US embassy cable - 05VIENNA1187

UNCLAS SECTION 01 OF 02 VIENNA 001187 
 
SIPDIS 
 
SENSITIVE 
 
PASS TREASURY FOR OASIA/ICB/VIMAL ATUKORALA 
TREASURY ALSO FOR OCC/EILEEN SIEGEL 
TREASURY ALSO PASS FEDERAL RESERVE 
SECDEF FOR OSD/ISP/EUR 
USDOC PASS TO OITA 
USDOC FOR 4212/MAC/EUR/OWE/PDACHER 
 
E.O. 12958: N/A 
TAGS: PGOV, ECON, EFIN, AU 
SUBJECT:  Austria's 2006 Budget - Analysis 
 
REFS:  A) VIENNA 1101  B) VIENNA 1097  C) VIENNA 0614 
D) 04 VIENNA 0273 
 
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Summary 
------- 
1.  (U) On April 7, Parliament adopted the GoA's 2006 
Budget Bill.  For 2006, the GoA predicts a federal budget 
deficit of 2.2% of projected GDP (EMU's Maastricht 
definition) and a corresponding consolidated public 
sector budget deficit of 1.7%.  The government's second- 
highest deficit since 2000 is a result of its 2005 income 
and corporate tax cuts, which now have an anti-cyclical 
effect.  Finance Minister Karl-Heinz Grasser defended the 
budget deficit as a consequence of the 2005 tax cuts, 
which are necessary to stimulate growth.  In 2006, 
Austria will be a Euro 780 million net contributor to the 
EU.  The 2006 budget also reflects GoA policies of 
stabilizing civil service costs and curbing growth in 
contributions to the social insurance pension system. 
The GoA's promise to balance the budget by 2008 seems 
unlikely.  End Summary. 
 
 
The 2006 Budget 
--------------- 
2.  (U) On April 7, Parliament approved the GoA's 2006 
Budget Bill with the support of the government coalition 
parties, the People's Party (OVP) and the Alliance for 
the Future of Austria (BZO).  (Note: the BZO includes 14 
out of 16 former Freedom Party parliamentarians; see ref 
A. End Note)  The opposition Social Democrats (SPO) and 
Greens voted unanimously against the Budget Bill.  Final 
figures for the 2006 budget are: expenditures of Euro 
66.2 billion (USD 86.0 billion), revenues of Euro 60.4 
billion (USD 78.5 billion), and a federal deficit of Euro 
5.8 billion (USD 7.6 billion), equal to 2.2% of projected 
GDP. 
 
3.  (U) The federal government deficit of 2.2% of GDP 
would be down slightly from the projected 2005 deficit of 
2.4%.  The corresponding consolidated public sector 
budget deficit (encompassing all levels of government, 
according to the EMU's Maastricht definition) will be 
1.7% (2005: 1.9%).  The 2006 budget is based on a 
projected growth rate of 3.9% GDP and a 4.2% unemployment 
rate. 
 
4.  (U) As a result of the 2006 deficit, the consolidated 
public sector debt (encompassing all levels of 
government) will rise to a projected Euro 159.8 billion 
by the end of 2006, with the federal government 
accounting for more than 90% of the debt.  In terms of 
GDP, the total public sector debt will decline to 62.8% 
from around 63.3% in 2005 - slightly above the EMU's 60% 
target. 
 
The Debate - The Same Old Arguments 
----------------------------------- 
5.  (U) Defending the budget in Parliament, Finance 
Minister Karl-Heinz Grasser stressed that the GoA 
accepted the deficit as a necessary consequence of the 
2005 income and corporate tax cuts that should boost 
growth.  Grasser noted that growth in 2005 and 2006 will 
be higher than in Germany and Italy, Austria's largest 
trading partners, and higher than the Eurozone average. 
Grasser acknowledged that a balanced budget in 2008 was 
an ambitious goal, but he ruled out tax increases.  He 
outlined the following GoA priorities: reduce 
unemployment, increase labor participation and labor 
market flexibility, increase economic growth, increase 
R&D spending, and reduce the tax burden. 
 
6.  (U) During the parliamentary discussion, SPO Chairman 
Alfred Gusenbauer accused the GoA of ignoring reality and 
Grasser of living in a "virtual reality."  He predicted 
the GoA would initiate austerity measures after the next 
elections.  Green MP Werner Kogler said there would be no 
balanced budget over the cycle.  He also criticized 
moving up the 2006 budget discussion from the fall of 
2005, when better economic forecasts for 2006 would have 
been available. 
 
7.  (U) In a press statement, the Austrian National Bank 
(ANB) expressed support for the GoA's general budgetary 
priorities, i.e., a lower deficit and a declining debt 
level.  However, the ANB urged more intensive efforts to 
reduce expenditures to achieve a balanced budget more 
quickly. 
 
 
Line Item Highlights 
-------------------- 
8.  (SBU) Defense: The MoD will receive no increase in 
2006, as funding will remain at the 2005 level of Euro 
1.81 billion (USD 2.35 million).  Defense expenditures, 
as a share of total budget expenditures, will fall to 
2.74% in 2006 from 2.83% in 2005.  As a percentage of 
GDP, defense spending will drop to 0.71% in 2006 from 
0.74% in 2005.  Despite a further reduction in military 
personnel by almost 700 to 22,760, the share of personnel 
expenses in total defense expenditures will rise to 
59.67% in 2006 from 58.27% in 2005.  Operating 
expenditures will increase to 21.49% from 21.16% and 
investment will drop to 18.84% from 20.57%. 
 
9.  (U) Development Assistance:  Funds for the Austrian 
Development Agency (ADA) will rise 3.9% to Euro 93.6 
million in 2006.  However, 
ADA's direct funding represents only about 15% of 
Austria's total development assistance.  Figures for the 
other assistance components are not yet available. 
 
10.  (U) EU Contributions:  The budget includes Euro 2.3 
billion in contributions to the EU, expected payments 
from the EU of Euro 1.6 billion, amounting to a net 
contribution of approximately Euro 780 million. 
 
11.  (U) Civil Service:  The GoA plans to cut another 
3,000 civil service jobs in 2006 to 170,500.  At Euro 
7.56 billion, GoA expenses for civil service salaries 
will remain stable at the 2005 level.  Total GOA 
expenditures for active personnel (including transfers to 
provincial governments for salaries of some 70,000 
teachers) will also remain stable at the 2005 level of 
Euro 10.3 billion.  Pension expenses for the rising 
number of civil service retirees will increase 2.4% to 
Euro 3.2 billion in 2006.  The moderate increase reflects 
savings from the GoA's 2003 pension reform.  Total GOA 
personnel expenditures for active and retired civil 
service employees (including outsourced and refunds) will 
be Euro 17.4 billion in 2006 after Euro 17.3 billion in 
2005. 
 
12.  (U) Pensions and Social Affairs: In addition to 
civil service pension expenses, GoA contributions to the 
social insurance system for pensions should rise to Euro 
6.7 billion in 2006 from Euro 6.6 billion in 2005 (2004: 
Euro 6.7 billion, 2003: Euro 6.9 billion).  In addition, 
the GoA will contribute Euro 4.9 billion (2005: Euro 4.8 
billion) for labor market programs and unemployment 
benefits, Euro 8.0 billion (2005: Euro 7.8 billion) for 
family allowances and nursing benefits, Euro 0.8 billion 
(no change from 2005) for hospitals, and Euro 1.8 billion 
(no change from 2005) for housing subsidies.  Including 
minor amounts for other programs, the GoA's total 
expenditures on social services, excluding civil service 
expenses, will be Euro 22.9 billion in 2006 compared to 
Euro 22.4 billion in 2005. 
 
 
Comment 
------- 
13.  (SBU) The GoA's promise of a balanced budget by 2008 
seems unlikely and will require additional revenues or 
expenditure cuts of more than Euro 2 billion in both 2007 
and 2008.  The GoA's hope that higher economic growth and 
expenditure cuts will suffice seems illusory.  To achieve 
a balanced budget, the GoA will have to make harsh 
political decisions on issues such as health and 
administrative reforms.  Substantial savings from a 
planned realignment of federal, provincial, and local 
government responsibilities seems unlikely. 
 
BROWN