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Public sector issues.

The OECD last examined the Austrian public sector in 1989, following the implementation of a major income tax reform and at a time when the role of the public sector was being reappraised in the context of a restructuring of the nationalised industries. The principal priority then identified was the need to carry through the announced medium-term programme of fiscal consolidation, aimed at cutting the federal budget deficit/GDP ratio from 5 per cent of GDP in 1986 to 2 1/2 per cent by 1992. This switch towards consolidation succeeded in stabilising deficit in absolute terms and, benefiting from an extended period of buoyant growth, in gradually reducing it as a proportion of GDP. By 1992, while missing the original target, the federal deficit ratio had come down to 3 1/4 per cent and the primary balance had moved into surplus. Including the budgets of other government levels and public sector agencies the general government deficit had fallen to a low of 2 per cent and the rise in public sector debt had levelled-off at around 57 per cent of GDP. On both accounts, the Austrian budgetary situation compared favourably with that of other OECD economies.

More recently, the consolidation process has stalled and is even being reversed. While the recession is partly responsible, there also appear to be a number of structural factors at work which are still making for upward pressure on public expenditure and budget deficits. Some of these pressures are shared with other OECD economies, with similar deleterious implications for allocative efficiency, distribution and budget flexibility. Moreover, certain institutional features may have led to additional problems of lack of transparency and defective control. These have been related, in particular, to the relationships between the various levels of government, which have blurred financial accountability by separating spending from financing responsibilities. They also relate, more generally, to the difficulties of managing the complex of government and semi-government agencies, which have led to a lack of clarity in setting policy goals and the absence of incentives to cost-effective management. These problems raise questions both about the proper design of fiscal institutions in a federal state and the best means of ensuring greater efficiency in the provision of public services.
Table 14. Public sector balance and debt/GDP ratios in the OECD area, 1992(1)

                        Per cent of GDP

Countries               Public sector            Debt ratios

Austria                  -2.5                     56.6

United States            -3.8                     61.3
Japan                     0.9                     67.9
Germany                  -3.3                     43.6
France                   -4.0                     52.4
Italy                    -9.8                    108.7
United Kingdom           -5.7                     41.1

Belgium                  -6.8                    137.2
Denmark                  -3.0                     63.1
Netherlands              -3.4                     78.4
Norway                   -2.1                     43.6
Spain                    -5.6                     52.7
Sweden                   -7.7                     55.4

OECD Europe              -5.4                     62.8

OECD Total               -3.8                     63.1

1. General government, including Social security.

Source: OECD, Economic Outlook No. 54.

The chapter begins with a discussion of medium-term budgetary pressures. This is followed by an analysis of institutional factors, concentrating first on the issue of the Austrian federal structure ("fiscal federalism") and then on financial relations with other public agencies. On both aspects, problems are highlighted by a number of case studies in public sector efficiency and resource allocation. The final section of the chapter outlines the steps being taken to improve budgetary control and responsibility and the further reforms needed to cope with the rising medium-term pressure on Austrian public finances.
Table 15. The size of the public sector in OECD countries(1)

                     General government outlays     General government

Countries                            Per cent of nominal GDP

Austria                      50.9                          48.5

United States                34.6                          30.7
Japan                        32.6                          33.5
Germany                      49.4                          46.2
France                       52.2                          48.2
Italy                        53.9                          44.0
United Kingdom               43.0                          37.3

Belgium                      50.8                          44.1
Denmark                      60.2                          57.2
Netherlands                  55.2                          51.8
Norway                       56.8                          54.7
Spain                        44.9                          39.3
Sweden                       66.9                          59.3

OECD Europe                  50.4                          45.0

OECD total                   41.2                          37.4

1. Average 1991-93.

Source: OECD, Economic Outlook No. 54.

Medium-term pressures and the need for reform

Underlying fiscal disequilibrium

As the analysis in the previous chapter has shown, central government finances have weakened recently, with federal government net lending now diverging significantly from the medium-term consolidation path laid down in the late 1980s. While a significant part of the deviation is due to weak overall activity and the Austrian structural budget situation is not worse than the OECD average, it is apparent that the drive for consolidation had already stalled before the onset of the current recession. Indeed, the opportunity offered by the boom to proceed decisively towards major deficit reduction was to a large extent missed.(45) Thus, by early 1991, when economic activity had just attained its peak, the government had postponed the target of a 2 1/2 per cent deficit/GDP ratio from 1992 to 1994. Moreover, the focus of deficit reduction had shifted away from the expenditure to the revenue side, contrary to original intentions. Despite the 1989 tax cut the ratio of federal government tax receipts to GDP has been allowed to rise by 2 per centage points over the last five years, with federal expenditure keeping pace.

In terms of the general government account, the ratios of expenditure and revenues to GDP rose by 3 per centage points between 1988 and 1993, while overall government net lending remained in the range of 2 to 3 per cent of GDP. This was low enough for the gross public debt ratio to stabilise. Moreover, budget deficits have at no time posed any problem of financing. However, medium-term projections suggest that, based on current legislation, the central government deficit is set to remain close to 5 per cent of GDP until 1996 and that the ratio of public debt will rise above 60 per cent.(46) Having been one of the few countries to be able to fulfil the Maastricht criteria, Austria now appears to need further fiscal action in order to reverse the trend towards divergence.

Pressures on public spending

Moreover, over the longer run, pressures making for greater imbalances are likely to increase beyond those implied by current policy settings. Prospective EU membership will itself require a substantial annual net contribution. Legal commitments made in recent years, mainly in the area of social transfers and debt servicing for off-budget agencies, have as yet not had their full impact on government outlays. Thus, the OECD medium-term projections suggest that, even under favourable growth assumptions, additional fiscal action may be needed to bring down general government net lending and contain the public debt ratio in the second half of the decade.(47)

Looking still further ahead, the ageing population will constitute a rapidly rising burden on public finances (see Economic Survey of Austria, 1988/89). While, compared with other countries, the demographic structure is already biased towards the elderly, birth rates are among the lowest in the OECD area. Therefore, the share of people aged 60 years and above in the total population is set to rise from one-fifth to almost one-third over the next three-and-a-half decades. The problem is further exacerbated by the fact that retirement benefits are relatively generous and the average effective retirement age has fallen to a low of 58 years. Since the federal government has taken on a legal obligation to cover that part of pension expenditure not covered by insurance contributions, the full incremental cost of the unfavourable demographic trend will fall on the federal budget. This effect will, by itself, push up expenditure by 4 to 8 per cent of GDP (depending on the particular demographic scenario) and only a fraction of it will be offset by lower expenditure required for education, child care and family support.(48)

Given the persistent upward pressure on expenditure and deficits and the potential "excess burden" of higher taxes, in terms of labour disincentives and other allocational distortions, greater efficiency would seem to be needed in the allocation of resources if the provision of public services is not to contract. This entails an overhaul both of control mechanisms by which different levels of government interact to achieve public expenditure goals and a reconsideration of the scope. In Austria's case, defects in these two areas may have led to over-spending and resource misallocation. Two broad aspects of public management are particularly at issue:

* "Fiscal federalism": the efficiency benefits of decentralised spending, which derive from an ability of regional and local levels of government to identify needs and preferences may provide a public choice rationale for a federal government system. Decentralisation, however, needs to be accompanied by financial discipline on local or regional government spending that appear to be somewhat deficient in some parts of the Austrian public sector; otherwise, inherent benefits may be offset by ineffective cost management.

* Extra-governmental agencies: the Austrian public sector is made up of a large number of "off-budget" legal entities besides the basic "territorial authorities", which have substantial financial resources at their disposal. Here also the absence of clear goals and financial discipline may have led to generalised pressures to over-spend.

The challenges posed in trying to structure both types of inter-governmental relationship are similar: to find mechanisms which allow an effective distribution of responsibilities and funds between different government levels and entities while at the same time ensuring transparency and financial accountability.

The public sector -- institutional features and problems

Generally speaking, there is no "optimal" way in which government spending and the raising of revenues should be allocated between different levels and authorities. In each particular case, the decision on the appropriate degree of (de)centralisation will, apart from historical tradition, depend upon the size of a country, its constitutional framework and considerations of administrative efficiency. Policy goals may also play a role. Thus, a country giving high priority to the convergence of living standards may opt for a more centralised fiscal structure allowing an equalisation of inter-regional differences; the same may be true for countries with a highly developed social welfare system. Given a constitutionally-imposed federal structure, as in Austria, there is an a priori case for fiscal arrangements to reflect the sharing of responsibilities between different government levels. However, the benefits of regional and local autonomy have to be set against potential disadvantages in terms of efficiency in the collection of revenues or of the overall distribution of welfare.

"Fiscal federalism" in Austria

Austria is a federal state where government responsibilities are shared between three levels of territorial authority, the federation (Bund), the nine federal states (Lander) and the municipalities (Gemeinden). Furthermore, the public sector comprises a number of other legal entities which carry out governmental TABULAR DATA OMITTED functions -- like the professional organisations (Chambers), the social security bodies and the public funds, such as the Family Benefit Fund or the Hospital Co-operation Fund. The distribution of major government responsibilities between the Bund and the Lander is determined by the constitution. This distribution, however, is not straightforward, and a distinction is made between legislative and administrative responsibilities. While the most important national agenda -- like defence, foreign policy, macroeconomic management, etc. -- are assigned wholly to the Bund, and others of mainly regional and local importance -- like construction laws and regulations -- entirely to the states, responsibilities are shared between the two levels in other matters -- like trade and industry, water supply, regulations concerning motor vehicles -- in the sense that the Bund is responsible for legislation and the states for administration.(49) A general clause gives the states responsibility for all matters not mentioned by the constitution.

Revenue-sharing under the federal system

Although the constitution provides for the sharing of government responsibilities between three levels of territorial authorities, the right to levy taxes is concentrated with the Bund. Overall, 74 per cent of gross revenues (including social security contributions) go to the central government in Austria, by far the highest ratio among federal countries [the range for gross revenues elsewhere TABULAR DATA OMITTED being from 64 per cent in Germany to 50 per cent in Canada]. Conversely, the states and municipalities can rely only to a small extent on "own" revenue sources to finance their legal commitments and other tasks and assignments. Such "own" revenues account for 17 per cent of current total revenues for the municipalities and less than 3 per cent for the states.(50) Consequently, almost the whole of state revenues (and 30 per cent for the municipalities) are accounted for by revenues received from the federation. These consist -- for the states in roughly equal amount -- either of fixed shares of the major revenues collected centrally, or of transfers, including those earmarked for specific responsibilities carried out by the states, like compulsory education or housing.

As a result of the revenue sharing process, which is highly complex,(51) the proportion of their gross revenues which the states can spend at their own discretion is raised to about 40 per cent. In other federal countries, the intermediate government level's independent resources account for between 55 per cent (United States) and 72 per cent (Germany), so the degree of "self-financing" is in this respect quite low in Austria. The municipalities, on the other hand, have 54 per cent of their revenues coming from "own" taxes and central revenue shares -- a higher ratio than for any other federal country.
Table 18. Revenue structure of States and Communities

Percent of total revenues, 1989

Communities(2) Own taxes                                   2.4
      17.3 Federal revenue shares                     45.8
  22.0 Transfers from other government levels     46.9(3)
8.4 Public charges                              --                        6.3
Debt raised                                 2.7                       4.3
Other revenues(4)                           2.2                      41.7

Total                                     100.0                     100.0

1. Including Vienna as a federal province.

2. Including Vienna as a community.

3. For example, earmarked transfers for housing subsidies, cost defrayal for
teachers' salaries, community contribution to provinces ("Landesumlage").

4. For example, drawing on reserves, privatisation and other one-off revenues;
for communities also certain user charges.

Source: Economic and Social Advisory Board, op. cit., Vienna 1992.

Spending responsibilities and the transfer system

Gross public expenditure is also concentrated in the hands of the central government to a much higher degree in Austria than in any other federal country (78 per cent compared with a range of 50 per cent in Canada to 65 per cent in the United States). Part of this is explained by the relatively substantial amount of transfers paid by the Bund to the lower levels of government. However, even adjusted for these transfers the central government share in overall net expenditure remains highest in Austria, with nearly 70 per cent. It is barely higher in some "centralised" countries (Italy 72 per cent) and can even be considerably lower (Denmark 45 per cent). This dominance is mainly at the expense of the states, whose share in gross expenditure (15 per cent) is clearly lower than that of any intermediate level in other countries (ranging from 27 per cent in the United States to 48 per cent in Canada). The expenditure share of the municipalities is also relatively low, but, again, closer to the position obtaining in other federal systems. The dominant role of the Bund is thus mainly at the expense of the states, whereas the municipalities have a degree of financial autonomy similar to those in other federal countries.

The transfer procedure on the lower government levels is guided in the main by two principles: productivity, based on regional or local tax revenues, and the demographic principle, based on the number of inhabitants. About 80 per cent of municipal resources are distributed according to population size. Thus, the states have very little responsibility for providing their own financial resources.(52)

Implications for efficiency

As the above description shows, the Austrian federal system is based on a complex, revenue-sharing system which gives rise to a number of problems and distortions:



* The automatic earmarking of funds from particular revenue sources to certain spending categories creates upward pressure on spending in the categories linked to revenue sources which have trended upward fairly steadily over time (for example, the more income elastic revenue sources). Thus, spending may well increase even as the underlying need for services decreases, as is the case in family allowances and housing subsidies;

* The fact that the share of overall tax revenues eventually transferred to the states and the municipalities is determined by criteria which largely emphasise size of population, and even "need", contributes towards an equal supply of public services nationwide. On the other hand, it implies a lack of incentive for states and communities to improve the quality of their local tax base. Thus, for example, local governments have little incentive to accept projects that may involve some negative externalities for local residents (e.g. airports, waste disposal sites, other transport facilities) but which might at the same time increase the tax base;

* The rise of federal transfers for the automatic defrayal of costs, combined with the assignment of responsibilities for spending decisions to lower levels of government, creates a strong bias towards over-supply;

* The reliance of categorical grants in aid (e.g. for major investments) rather than block grants leaves little room for local choice.

More generally, since the overwhelming part of the legal responsibilities assigned to the states by the federal constitution is financed from sources outside the states' responsibility, there is no direct connection between the political responsibilities of spending and taxing. Popular spending decisions are in many instances taken at the lower government level closer to the electorate, while unpopular taxing decisions are taken at the more distant central level. This separation creates distortions in the supply of public services. Local and regional populations will tend to claim more public services which they regard as "free" in the sense of obtaining a higher share of a given quantity (supplied at the national level). Local and regional governments will be tempted to bow to these claims or even take the initiative in increasing supply as the cost will be borne by the central level.

This tendency to oversupply will be particularly strong for expenditure financed by earmarked transfers from the Bund. Whereas there is an incentive to apply efficiency criteria for public services provided by the states from general revenue shares -- as higher outlays on one item will mean lower ones on others -- no such incentive exists for items financed by earmarked resources. Such financial arrangements exist for housing subsidies and education costs. For these areas there is empirical evidence of inefficiencies and over-supply by international standards.(53)

Two case studies: education and housing

* Education

By long tradition the Bund bears the costs of salaries and retirement benefits of the teachers employed by the states. In all, in 1993 these refunds amounted to some 7 per cent of all government revenues. Since the early 1980s expenditure on this item has broadly kept pace with the overall trend in spending, despite the relief provided by demographic trends: as a consequence of the falling birth-rate, the number of children of compulsory school age has fallen by more than 25 per cent since the early 1970s. Given the policy priority granted to education up to the mid-1970s and the long lags involved in teacher training, an excess supply of teachers built up during the 1980s. At least part of the surplus was absorbed by lowering class size and the pupil/teacher ratio(54). The states, responsible for providing compulsory education, but not for bearing personnel costs, had a strong incentive to boost the employment of teachers, particularly as such policy could be defended in terms of improving the "quality of education".

The fact that the federal government covers personnel costs is logical inasmuch its makes decisions in such areas as curriculum, class size, teaching loads and teaching standards. However, the education guidelines established by the federal government are, perhaps necessarily, vague (e.g. the guidelines may specify that class size may not be more than 30 students, but it can be significantly less). In a system of automatic cost defrayal by the federal government for local expenses, the vagueness of the guidelines permits local demand for educational services to become inflated. At the same time, decisions taken at the federal level have financial implications for municipal governments, which are responsible for providing material infrastructure (buildings, classroom facilities, equipment). For the sake of the accountability and effectiveness of the system as a whole, it would be desirable if legal and financial responsibilities in educational TABULAR DATA OMITTED matters were concentrated on the same level of government. Indeed, this level of government may differ for different levels or types of education.

* Housing

While construction laws and regulations and residential building are a legal responsibility of the states, the federal government has always been responsible for housing promotion and related subsidy schemes. Before 1988, a fixed proportion (10.19 per cent) of direct tax revenues was earmarked for housing subsidies. In 1988, legal responsibility for housing promotion was transferred from the federation to the states, each of which passed its own law regulating the matter for its own territory. However, financial responsibility remains with the Bund, the change being effectively an accounting one.(55)

Since the resources earmarked for housing promotion come from relatively "elastic" taxes the sector is guaranteed a comfortably growing supply of funds. The states and the municipalities thus have no constraint on spending the resources available, which serve to guarantee incomes to local construction firms and attract residents and (thus) taxpayers. At the same time, studies have shown that housing subsidies in Austria are not only generous but also tend to favour the middle and upper income strata.(56)

In view of the change in legislation which took place in 1988, it is regrettable that the occasion was missed to strengthen financial autonomy and responsibility of the states by abolishing the earmaking of revenue shares for housing subsidies.(57) This would have provided an incentive for reviewing the efficiency of housing promotion, leading potentially to a general lowering of subsidies and the phasing out of market distortions.

Managing public agencies

Apart from the territorial authorities, there are a number of other "para-fiscal" institutions which to some extent carry out government responsibilities and are therefore part of the public sector; among these are the social security institutions, the professional associations (chambers), public funds as well as a number of public enterprises like the Post and Telecommunication Administration (OPT) or the Austrian Federal Railways (OBB). Their governmental function is reflected, inter alia in their legal status, their mandates and tasks assigned. They are financed either by user charges -- in the case of public enterprises -- or by compulsory (social insurance) contributions and (membership) fees as well as by transfers from the federal budget.

Their financing, particularly the part involving the federal government, gives rise, in some instances, to problems similar to those discussed under the heading of fiscal federalism. Institutional arrangements are such that inherent pressure for rising expenditure may be exerted on the federal budget, making for a "structural" widening of the deficit. Such pressure may arise from a number of sources: because goals for public intervention and federal financial contributions are unclearly defined; because decisions on services offered are separated from responsibilities for their financing; from automatic access to government funds and thus the lack of incentive for cost-effective management; and from a disregard of the long-term implications of policy decisions. These problems may be illustrated by a number of examples.

The Federal railways

As in many western European countries, the Austrian Federal Railways (OBB) have by tradition been a public enterprise, with the Bund, as the owner, responsible for maintenance and investment. It also pays substantial transfers to cover operational and debt service cost, amounting to more than 5 per cent of overall Federal expenditure in 1993. These transfers cover retirement pensions; revenue losses due to services rendered in the general public interest through subsidised fares and tariffs; maintenance of unprofitable lines; offering of short-distance public transport, etc., and other operational losses.
Table 23. Federal government transfers to the Federal Railways (OBB)

Sch million, 1991

Old-age pensions                            12 693
Granting of "social fares"                   3 441
Granting of subsidised tariffs               1 520
Road transportation fee                         54
Continuation of low-frequency lines          2 022
Personal commuter transport                  3 449
Maintenance of railroad infrastructure       4 735

Total                                       27 914

Source: Annual Statement of OBB, 1991

Over the last 30 years, the "self-financing" ratio of the OBB has fallen steadily from over 80 per cent to less than 50 per cent. Operational revenues have been dampened by the loss of market shares vis-a-vis road transportation, the extension of "social" fares and the flattening trend of overall economic activity. Expenditure, on the other hand, has risen much faster, due to the widening and improvement of services offered in order to remain "competitive" and to relatively modest cuts in personnel.

By international comparison, labour productivity within the OBB appears to be quite low. In terms of output per employee in 1990 it was 27 per cent below the level of Deutsche Bundesbahn (DB) and 36 per cent below that of the Swiss Bundesbahn (SBB). In terms of revenues, excluding refunds, the difference is even more striking: revenues per employee of the OBB were only 57 per cent of those of DB and 38 per cent compared with the SBB figure. Indeed, while operational revenues covered as much as 75 per cent of total outlays of SBB and 62 per cent at DB, the corresponding figure for the OBB was only 48 per cent in 1990.(58) At the same time, traffic density (service kilometres per rail kilometre) has been nearly as high for OBB as for DB.

Manning at OBB is still at a high level, despite a reduction by 10 per cent over the last 20 years, in contrast to DB, which succeeded in raising output per employee by no less than 77 per cent over the last fifteen years, to a large extent by cutting personnel by more than 40 per cent. Although salaries are relatively low, particularly in the early stages of service, given the relatively low productivity unit personnel costs are markedly higher for OBB than for the two other national railway companies. Procurement costs too are relatively high as the investment and procurement policy of OBB has been geared towards securing jobs in Austrian industry.

The low profitability of OBB is also caused by relatively low passenger fares determined by social and environmental considerations.(59) However, it is doubtful how far the envisaged goals are actually attained. Empirical evidence on redistributive effects shows for Germany and Austria that low fares benefit primarily middle-income strata rather than low-income people.(60) Moreover, despite a considerable price advantage in favour of rail, there has been relatively little shift from road to rail traffic.(61) Although train fares in Switzerland are one-third higher than in Austria (calculated on the basis of purchasing power parities) the Swiss make twice as much use of their railways as the Austrians.
Table 24. Performance indicators of national railway companies of Austria,
Germany and Switzerland, 1990

                                                  OBB(1)   DB(2)   SBB(3)

Operational structure

Average transportation distance (km)
Personal transport                                 38       41       42
Goods transport                                   199      222      160
Traffic density per railroad kilometre (million
unit per km)                                        3.8      3.9      6.5

Productivity (per employee)

Transport volume (1 000 units))(4)                  4.9      5.8      9.0
Transport output (million units per km)           343      466      553
Revenues (Sch 1 000)                              343      561      851

Costs (Sch per unit/km)

Personnel                                           1.54     1.35     1.27
Material and depreciation                           0.54     0.60     0.78
Total operational costs                             1.80     1.67     1.66

Personnel cost per employee (Sch 1 000)           529      627      704

Receipts from fares

Sch per per/km                                      0.59     0.88     1.05
Sch per net ton/km                                  0.84     0.96     1.27
Sch per unit/km                                     0.73     0.93     1.15

1. Austrian Federal Railways (Osterreischische Bundesbahn).
2. German Federal Railways (Deutsche Bundesbahn).
3. Swiss Federal Railways (Schweiserische Bundesbahn).
4. Persons and tons (of goods).
5. Excluding debt interest payments.

Source: W. Puwein, "Die OBB-Reform 1992", op. cit..

Family benefits

By long tradition, Austria has a well-developed and generous system of family support. It consists of income-tax credits; contribution-free social security coverage for dependents, compulsory education free of charge and monthly cash benefits.(62) Taken together, these measures amounted to some 10 per cent of national income in 1990. The monthly cash benefits are paid out of a central government fund financed by employers' contributions and earmarked shares of general tax revenues. In addition to nationally-administered benefits, the states grant further child benefits (subject to income ceilings). The average benefit per child amounted to some Sch 80 000 per annum with a tendency to rise. From mid-1991, paid parental leave was extended from one to two years for children born after June 1990 and at the beginning of 1993 tax concessions to families were further increased by a total of Sch 7 billion. By international comparison the amount of family subsidies in Austria is very high. Indeed, together with Belgium and France it is the highest among OECD countries.

In general, public support to families may have two different aims: to contribute towards covering the costs of raising children and to help low-income earners.(63) In spite of the system's apparent generosity, Austria's birth rate is one of the lowest in the OECD. Moreover, evidence suggests that the risk of poverty rises steeply with family size. Empirical evidence shows that lower-income groups are the main beneficiaries of some cash benefits, but the ultimate effects on income distribution are blurred by the differential impact of the length of TABULAR DATA OMITTED schooling on total cash benefits received and the free access to all public education facilities.(64)

The goals of Australian family policy have occasionally been defined in programmatic terms. Official statements refer to the extra financial burden that families with children have to bear and for which family benefits are intended to (partly) compensate. This leaves wide scope for interpretation of the redistributional design of family policy and, indeed, the actual stance of policy has shifted over time. Whereas up to the mid-1950s support was targeted towards low-income families, coverage was extended subsequently and motives of horizontal redistribution gained ground. This was underlined when, in the late 1960s, income ceilings on benefits were waived, giving high income earners greater benefits from existing tax allowances than low-earners. In the 1970s, family subsidies shifted away from tax concessions towards flat-rate cash benefits, according to the principle of "equal treatment for each child". However, higher income groups still tended to draw relatively greater benefit as their children attend higher education to a relatively higher degree, entitling them to family subsidies for a longer period.(65) Since the later 1980s the emphasis has shifted back to tax concessions, a stance reinforced in 1992 after a Constitutional Court ruling found tax treatment of families inadequate. While maintaining the previous stance of giving tax credits rather than tax allowances, the government reintroduced a progressive benefit schedule by family size (number of children).

Family benefits are financed via a government fund(66) financed from earmarked taxes and employers' contributions based on the payroll. These rise quasi-automatically with nominal incomes and employment and appear to be tied to revenue aggregates with an above-average income elasticity. By contrast, the number of beneficiaries is declining or at best stagnating due to demographic reasons. This relatively comfortable financial position has led to upward pressure on spending, as reserves in the family benefit fund have accumulated. Thus, the level of benefit has risen substantially in real terms over the last decades and new benefits -- e.g. at child birth, free school transport and textbooks -- have been introduced to use up surplus funds. Those financial reserves which have not been translated into higher benefits have been transferred -- directly or indirectly -- to other uses. On balance, however, the earmarking of funds and political pressure has made the system very rigid. The new tax credits, for example, were put "on top" of the existing scheme thereby further increasing the already very generous support and adding to budgetary strain.(67)

Social security

Present arrangements of the state pension system also put the federation into a highly unfavourable position to resist higher social security spending. Legislation and administration of social security and insurance is, by the constitution, the responsibility of the federal government, but administration has been delegated to independent institutions ("Versicherungstrager") which are formally autonomous, but essentially execute federal legislation on health, work-accident and old-age insurance. Altogether, there are 28 social security bodies, each one being responsible for a particular risk and/or a specific category of the work force, as well as by regional criteria with management and control boards delegated by the social partner organisations.

Social security contributions cover more or less total expenditure for health and work accident insurance (except for some government subsidies to farmers), but they cover only about 75 per cent of old-age insurance outlays, the remainder coming from central government transfers.(68) In fact, the federation has taken on a legal obligation to make up for the difference between annual pension outlays and contribution revenues. These transfers currently amount to 7 per cent of central government expenditure. Government subsidies to the pension system tend to rise over time, not only in absolute, but also in relative terms as retirement expenditure outpace contributions. This is partly due to demographic shifts, to early retirement and "structural" factors consisting mainly in echo-effects of discretionary benefit increases. Thus, in order to limit the burden on the federal budget the government has occasionally passed on the rising costs to the actively insured by raising contributions. In fact, employees' pension contribution rates have doubled from 11 per cent to almost 23 per cent of gross wages and salaries over the last three-and-a-half decades. They are now one of the highest in the OECD area, due to the combined effects of an elderly population, a low effective retirement age and generous benefits. Moreover, a number of measures have been taken over the last decade to curb the rise in expenditure.

Having committed itself to a financing "guarantee" for whatever size the current deficit happens to be, the government has to bear the full incremental costs of the widening gap between expenditure and the contribution base(69). Among the institutional factors contributing to this increasing budget burden, three may be identified:

a) Split of responsibilities. As has been pointed out, the social partners play an important role in the formulation and implementation of social policy, representing and controlling the management of the social insurance bodies, and participating in social policy legislation. As a rule, both tasks are carried out by the same people both on the employers and the employees side. As social insurance covers both employers and employees, and both groups are liable to contribution, there is a common interest in increasing benefits while avoiding increases in contribution rates.(70) Thus, all parties concerned tend to invoke the "commitment" of the Bund to pay one-third of total outlays. A recent study undertaken under the auspices of the social partners and dealing with long-term problems of the pension system, sees no scope for alleviating the financial burden of the Bund.(71)

b) Unclear goals. The financial share of the Bund in retirement expenditure is often justified by the existence of non-contributory elements in the pension system. Thus, there is a minimum level for pensions even for those whose contributions would give them lower entitlements. Furthermore, certain periods out of work -- e.g. unemployment, sickness, maternity, schooling, military service -- count for pension rights, although the beneficiary pays no contribution. However, the exact amount of these non-contributory elements has rarely been quantified, while the law provides for compensation for some of these items from separate funds (thus, amounts required to cover minimum pensions are paid by the Bund under a separate heading). The costs of benefits involved are thus not very visible to the insurance "customers".

c) Time lag between political benefits and financial costs. In some instances, the full costs of a decision to raise benefits become visible only with a long time lag. This is particularly relevant for a retirement scheme where more generous benefits extend with every age cohort and costs increase progressively as the system matures. Also, for a system financed on a "pay-as-you-go" basis a comfortable actual financial position may create an illusion on long-term requirements. Thus, in Austria, a "fiscal dividend" in cyclical boom periods has repeatedly led to increases in pension benefits beyond the regular cost-of-living adjustments with disregard for the long-term financial implications.

Federal contributions thus tend to hide the "true" cost of old-age insurance, blur its redistributive impact and give rise to "free-rider" problems. Indeed, if the active population were aware of the full costs of the pension scheme, the apparent popular support for extending early retirement would have been less strong and the raising of the effective retirement age, a key condition in meeting the long-term demographic challenge, would be easier to achieve.

Agenda for reform

Progress so far

Over the last six years the government has taken a broad array of measures in different areas designed to reform public sector institutions and improve their management. The measures taken so far may be grouped into three broad categories:

* privatisation of public assets;

* transfer of public assignments to off-budget agencies with ultimate (financial) responsibility remaining with the federal government;

* legal reforms to reduce major financial commitments over the medium term.


In their Working Agreement of early 1987 the two major parties forming the government coalition agreed on a programme of privatisation of public assets as a means not only of lowering the public sector deficit in the short term, but also of ensuring a sustained improvement in public finances. Between 1987 and 1989 net receipts from asset sales amounted to almost Sch 20 billion. However, less than half of the total was raised from sales to the general public. For instance, the Mint was sold to the National Bank.(72) Other major "privatisation" measures concerned Austrian Airlines, the major banks and the Austrian Tourist office.

Since 1990 active privatisation has virtually ceased, partly due to stock market weakness. While federal participation in some important companies (such as the national airline and financial institutions) has been allowed to fall below the earlier threshold of 51 per cent (as the state did not participate in the issuance of additional equity to the private market), overall, "privatisation" has resulted in only a small fall in the federal government share in those companies where it has held a stake, from about 75 per cent to 66 per cent. Excluding the special case of the Mint (which was a federal enterprise) the nominal value of state participation fell only by Sch 4 1/2 billion between 1987 and 1990, for which the federal government received earnings of some Sch 11 billion.(73)

Transfers to off-budget agencies

The Working Agreement listed a number of possibilities for moving federal agencies and enterprises off-budget, a process often referred to as corporatisation. The following projects have been carried through: Schonbrunn castle and zoo; waterways agency; federal real estate agency; public debt management agency; the merging of special agencies for road construction and management; and Austrian Federal Railways (OBB).

A new law of 1992 provides for the transformation of the OBB from a Federal enterprise into a public corporation. By splitting up the Railway organisation into two separate agencies -- infrastructure and operation -- it is intended, according to the working agreement of the government parties, "to boost productivity and efficiency of railway transportation of people and goods". Moreover, the new structure is in line with EU guidelines providing for a future utilisation of the national railway infrastructure by different customers (international companies) under competitive conditions. Nevertheless, the Minister of Transport retains the powers to:

* issue general rules for OBB "in order to enforce transportation policy guideline and even to give specific orders in cases of emergency;

* appoint two-thirds of the members of the supervisory board and exert management control;

* define and commission services in the general public interest. However, these commercially non-viable services will be refunded to the OBB by the government in line with rules set by the Ministers of Transport and of Finance.

The government also remains responsible for the maintenance and expansion of the railway infrastructure, for the use of which the OBB will pay user fees.

All regulations concerning personnel, pay and retirement remain unchanged, although the new management has to negotiate new regulations with labour representatives which will be applicable to new entrants as from 1995.

Studies on the subject are on balance sceptical about the advantages of extra-budget financing.(74) As a rule, extra-budget financing will constitute only a postponement of budget obligations rather than an actual reduction. In this way, it constitutes an ex-ante burden on future budgets adding to budget rigidity and reducing transparency, due to violation of the principles of budgetary unity and comprehensiveness (and contributing to even greater complexity in the fiscal structure). Moreover, insofar as moving programmes off-budget is increasingly used in order to secure financing of public investment, and the debt interest burden will still ultimately fall to the state, the extent to which it is a mere accounting device depends on the financial management reforms undertaken, especially the provision of incentives for securing optimal financing conditions. The example of Deutsche Bundesbahn (DB) shows what can be achieved in the way of productivity improvement, but this result was achieved by a management board recruited from the private sector; an essential precondition for this achievement was the consent of labour representatives and strong backing by the government. Both factors will remain crucial to the success of the OBB reform.

Table 26 shows that off-budget financing has anyway been on the rise during the 1980s. Between 1981 and 1990 annual amounts spent almost tripled, to a total of nearly Sch 17 billion. This helped to partly compensate for the decline of on-budget federal investment expenditure as from 1987. The share of total federal investment expenditure financed off-budget rose from one-fifth in the early 1980s to 45 per cent in 1980. Usually, as in the case of the road construction and management agency, the independent entity concerned takes up loans on the capital market to finance the infrastructure building projects, with interest and debt repayments remaining within the federal government budgets. While such arrangements help to alleviate short-term constraints on public investment, the cumulation of debt and annuities set clear limits to this strategy. As can be seen from the table, annual payments due from the federal budget are quickly catching up with the total volume of off-budget financing. Such payments are TABULAR DATA OMITTED projected to burden the federal budget by some Sch 24 billion by 1995, a rise by almost 50 per cent within only five years.

The Motorway and Transit Road Financing Agency (ASFINAG) provides an illustrative example of the implications of off-budget financing. Founded in 1982 to raise long-term capital for the financing of highway construction and maintenance, its responsibilities were later extended to the financing of railway infrastructure and public administration buildings. Expenditures of the agency are financed by receipts from road toll fees and by federal transfers covering current debt service and repayment costs. During the 1980s the operation of the agency helped to maintain a high level of public investment while lowering the federal budget burden, but the long-term consequences have been less favourable. The agency's own receipts from toll fees have stagnated, while federal transfers have doubled and are set to rise further. Since the agency, in its operations, incurs administrative costs but is not subject to market constraints and risks, on-budget financing might, from a long-term perspective, even have meant lower budgetary commitments.

Legal reforms

In recent years, the government has taken major initiatives to facilitate structural adjustment in key areas of spending: in 1993, a comprehensive reform of the old-age insurance system took effect; furthermore, a reform bill concerning career and salary patterns in the public sector has been drafted. The major thrust of the pension reform is to improve pension entitlements for parents raising children but also, more fundamentally, to strengthen the "insurance principle' by bringing individual benefit entitlements closer in line with accumulated contribution payments. The new measures taken will, on balance, increase benefits and are thus not expected to affect federal annual subsidies, but potential cost-saving measures, like the switch to net earnings as the yardstick for the annual cost-of-living adjustment, or the raising of women's retirement age to the level obtaining for men, should produce tangible savings in the long run. On the other hand, the incentives provided by the reform to postpone individual retirement appear too weak to raise the -- by international standards -- very low retirement age and allow the system to cope with the demographic challenges ahead.

What more needs to be done

The measures taken so far do not appear to go far enough in controlling the growth of budget deficits and in enhancing incentives for efficient and effective government. Other Member governments have moved farther in public sector reform, and understanding of which reforms work and why is improving.(75) Left to evolve in its current financial and organisational framework, the Austrian public sector faces the prospect of gradually deteriorating finances and of relative declines in performance (compared to those of other countries). Given the relative weight of the public sector in the Austrian economy, this is likely to be harmful to the overall development of the economy. A crucial first step in reversing these trends would be to subject the sector as a whole to more binding financial disciplines. These provide the necessary foundation upon which other public sector reforms -- for example, in the areas of civil service salaries, corporatisation and systems for monitoring performance -- could be laid.

Streamlining fiscal federalism

No major steps have as yet been taken to make the distribution of public revenues among different levels of government less complex and more transparent. A guiding principle for any reforms should be to strengthen the financial accountability of lower government levels. While arguments could be adduced in favour either of greater local autonomy or greater centralisation, it appears that the Austrian system does not fully benefit from either. To be more consistent with the federal nature of the Austrian constitution, the states should be able to rely on their own tax revenues to finance their constitutional responsibilities. Earmarked transfers from the central government, especially costs and expenses defrayed by the federation, should, in this case, be eliminated in favour of own taxes, or at least larger shares of shared taxes. There are limits to the extent to which tax regulations and tax rates may differ by region, particularly in a small country like Austria. However, regional and local governments, often pushed by popular demand, will be inclined to increase spending on "merit goods" beyond efficient levels unless they are made financially responsible and accountable for their spending decisions and are fully aware of the full (opportunity) costs involved in each particular case.

As far as local communities are concerned there does not seem to be an urgent need for reform towards more financial autonomy. It seems to be more important to ensure their financial stability. A large step in this direction was made with the tax reform of 1993 which includes complete abolition of Gewerbesteuer (a tax on the profit of industry and trade) and replacement by Kommunalsteuer (an upgraded version of payroll tax). Municipalities will therefore have at their disposal a tax which has a more stable tax base than Gewerbesteuer. The latter's tax base was very negatively affected by the present recession.

In view of Austria's imminent EU membership, initiatives will need to be taken to adjust the federal constitution and, inter alia, strengthen legal responsibilities of the states. In this connection, the coalition partners have expressed the intention of reforming the allocation of competences between the Federation and the Lander to take account of the principles of subsidiarity, the need to strengthen direct Lander administration and to reduce indirect federal administration. Indeed, this would appear to be a good occasion to extend reform considerations to aspects of fiscal federalism and, by fostering fiscal responsibilities of states and communities, move towards both higher degree of transparency and efficiency in the management and use of public resources.

Trimming the size of the public sector

Given the still relatively large size of the public sector in Austria, it may be argued that some of the activities presently carried out by public authorities would in fact be best provided by private agencies. There are a number of examples -- ranging from manufacturing of medical supplies to chemist's shops to agricultural laboratories -- where public ownership or management may have originated accidentally and where reasons for maintaining public sector involvement no longer exist. On a somewhat larger scale, recurrent problems with the nationalised industries suggest that the privatisation programme needs rapidly to be completed. Subsidies to cover past losses will burden the federal budget for many years to come, at an annual amount currently of Sch 5 to 8 billion. This drag on budget flexibility should not be allowed to increase further. The drive for privatisation has stalled in recent years, but the coming recovery should provide the opportunity for future moves in this direction.

Improving the management of public agencies

To the extent that the fiscal system in Austria continues to rely on a corporalist approach, rather than one based on full privatisation, steps need to be taken to improve the co-ordination between central government and the agencies involved. The transformation of the OBB from a federal enterprise to a public company is a case in point, intended to strengthen management responsibilities and raise operational productivity. However, taken by itself, such a step is probably not sufficient to ensure better allocation of public resources. Indeed, central government transfers to the OBB are set to rise rather than fall over the next few years.(76) In order to ensure that the goals of such reforms be met it will be important to ensure that:

* the sector of non-commercial services undertaken in the "public interest" be closely scrutinised;

* the off-budget entity should not be allowed to claim a monopoly for services in the "public interest";

* services carried out in the predominant interest of states and municipalities should at least partly be financed by them;

* scope for higher fares and user costs be fully exploited.

It is also important to set clear and coherent goals. For example, environmental and other social costs of the railways are generally much lower (per unit of output) than those of motorised road transport. The railways could benefit from this if transportation policy were to internalise the external costs of road transportation. However, present policy is trying to maintain competitiveness of railway transport by subsidising it. In doing so, market prices for transportation services are, on average, reduced, boosting demand beyond optimal levels. Production and distribution of semi-public goods and services -- and with them consumption patterns and residential structures -- would be less distorted if the implications of socialising costs were more fully recognised and identified. Indeed, in the case of public funds and off-budget agencies, if government subsidies are involved, their purpose and amount should be clearly defined. In particular, unconditional deficit coverage (such as obtains in the Austrian pension fund) should be avoided as it is bound to weaken incentives for expenditure restraint and efficient management.

Table 19. The distribution of government revenues

Stage 1 Revenue sharing

Joint federal tax revenues ("gemeinschaftliche Bundesabgaben")

minus tax refunds ("Erstattungen", z. B. Bausparpramien)

Budgeted gross revenues (Steuereinnahmen lt. Bundeshaushalt)

minus a-priori deductions ("Abgeltungsbetrage", z. B. FLAG)

Revenues to be shared between territorial authorities

* Vertical sharing

Fixed proportions (different from each tax)

* Horizontal sharing

Among Lander and communities

Criteria: Local tax yield (= 20 per cent of revenues) Population size (= 80 per cent of revenues)

Stage 2 Transfers

Earmarked transfers (e.g. housing subsidies) ["Zweckzuschusse"]

Cost defrayals (e.g. teacher salaries) ["Kostenubernahmen"]

Grants-in-aid (e.g. for major investment, to restore budget equilibrium) ["Finanzzuweisungen"] financed out of 13.5 per cent of Gemeinde revenue shares retained by the Lander.

Community contribution to Lander ["Landesumlage"] (8.3 per cent of Gemeinde revenues).

Stage 3 Implicit financial flows

Induced by:

Transfers to other government agencies (e.g. public funds) Changes in tax laws and tax rates Private sector activities of public authorities.
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Title Annotation:Austria
Publication:OECD Economic Surveys - Austria
Date:May 1, 1994
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