Government postpones cuts in taxes and non-wage labour costs
Due to deteriorating medium-term prospects for the Austrian economy, and as a result of the enormous damage caused by recent flooding, the government decided in August 2002 to postpone reductions in both non-wage labour costs and company taxation originally planned for 2003. However, the Chamber of the Economy, representing business, has continued to call for action in these areas in 2003, especially in the light of the coming enlargement of the EU.
In mid-August 2002, the coalition government of the conservative People’s Party (Österreichische Volkspartei, ÖVP) and the populist Freedom Party (Freiheitliche Partei Österreichs, FPÖ) announced that a comprehensive reform of Austria’s company taxation system originally planned for 2003, as well reductions in non-wage labour costs, have been postponed until 2004 for budgetary reasons. Due to the fact that the prospects for the Austrian economy have worsened significantly, the government argues that it would not be reasonable to reduce tax rates and non-wage labour costs as soon as 2003, as demanded by business representatives. Moreover, the flooding that devastated several regions in the north-east of Austria in August 2002 has caused an estimated EUR 7 billion of damage, which government subsidies are needed to repair.
Nevertheless, the Austrian Chamber of the Economy (Wirtschaftskammer Österreichs, WKÖ) has not dropped its long-standing demand for a reduction in non-wage labour costs (AT0208201N), but only modified it. The business and employers' organisation is still demanding that at least some components of non-wage labour costs, such as companies’ contributions to industrial injuries insurance (Unfallversicherung) and the Insolvency Payment Insurance Fund (Insolvenz-Ausfallgeld-Fonds), should be reduced. Furthermore, a reduction in taxes on reinvested company profits to be introduced in 2003 should precede a more comprehensive tax reform worth EUR 3 billion in 2004. At a press conference held on 21 August 2002, Christoph Leitl, the chair of WKÖ, argued that postponing these reforms will endanger up to 20% of Austria’s enterprises and about 400,000 jobs within a few years, since EU enlargement will lead to competitive disadvantages for Austrian companies due to their higher burden in terms of labour costs and taxes. In particular, the fact that several prospective new Member States are neighbours of Austria is seen as a strong incentive for Austrian companies to move their operations to one of these countries. This reasoning, however, brought harsh criticism from both the government and the opposition parties, which saw it as playing a dangerous game with people’s fear of EU enlargement.
In accordance with the views of the Institute of Advanced Studies (Institut für Höhere Studien, IHS) and the Austrian Institute of Economic Research (Österreichisches Institut für Wirtschaftsforschung, WIFO), Martin Bartenstein, the minister for economic and labour affairs, and Karl-Heinz Grasser, the minister of finance, have refused WKÖ’s demands. On 21 August, WIFO presented an updated economic forecast stating that Austria's budget deficit will rise to 1.5% of GDP in 2002, while real economic growth will be only 1% in 2002 and between 1% and 2% in 2003. As a consequence, an immediate tax and labour cost reform is considered unfeasible. In particular, Minister Bartenstein has strictly ruled out any reductions in contributions to unemployment insurance and the Insolvency Payment Insurance Fund, as proposed by WKÖ.
Meanwhile, WKÖ has gained (unexpected) support from parts of the opposition Social Democratic Party (Sozialdemokratische Partei Österreichs, SPÖ) as well as from Jörg Haider, head of the provincial government of Carinthia and former chair of the FPÖ, who still exerts great influence on the party. Mr Haider has strongly opposed the government’s decision to postpone the tax reform and put considerable pressure on the FPÖ to break with the government’s policy. This means that the debate on the reform of taxes and non-wage labour costs will continue for the foreseeable future.