US embassy cable - 05VIENNA2786

UNCLAS SECTION 01 OF 02 VIENNA 002786 
 
SIPDIS 
 
PASS TREASURY FOR OASIA/ICB/VIMAL ATUKORALA 
 
TREASURY ALSO FOR OCC/EILEEN SIEGEL 
 
TREASURY ALSO PASS FEDERAL RESERVE 
 
USDOC PASS TO OITA 
 
USDOC FOR 4212/MAC/EUR/OWE/PDACHER 
 
PARIS ALSO FOR USOECD 
 
FRANKFURT FOR JIM WALLAR 
 
E.O. 12958: N/A 
 
TAGS: ECON, EFIN, ELAB, AU, EUN 
SUBJECT: GOA UNVEILS PACKAGE TO FIGHT RISING 
 
 
UNEMPLOYMENT, BUT REJECTS FURTHER TAX CUTS 
 
REFS:  A) VIENNA 2349  B) 04 VIENNA 273 
 
Summary 
 
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1.  The GoA recently announced a Euro 1.2 billion ($1.5 
 
billion) stimulus package of employment and growth 
 
initiatives.  The GoA also plans to introduce a 
 
combination-wage model to subsidize low-paid jobs. 
 
Economists view the GoA's package as positive, but note 
 
that only GDP growth in excess of 2.5% will effect a 
 
lasting improvement in the rising unemployment trend. 
 
The opposition Social Democrats (SPO) and some in the 
 
government's junior coalition partner Alliance Future 
 
Austria (BZO) are calling for tax cuts to stimulate 
 
growth and counter rising unemployment.  However, 
 
Chancellor Schuessel and Vice-Chancellor Hurbert Gorbach 
 
agreed that consideration of further tax relief should 
 
wait until after the 2006 elections.  End Summary. 
 
Government Moves to Reduce Unemployment 
 
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2.  The GoA and Austria's nine state governments recently 
 
agreed on a "Regional Employment and Growth Pact" to 
 
stimulate the economy and reduce unemployment.  The GoA's 
 
move is in response to growing concerns regarding 
 
increasing unemployment and corresponding criticism from 
 
opposition parties.  Media and the opposition have 
 
highlighted Eurostat's recent upward revision of 
 
Austria's 2004 unemployment rate from 4.6% to 5.1%. 
 
3.  The stimulus package totals Euro 1.2 billion ($1.5 
 
billion) for regional employment and economic growth 
 
initiatives.  However, only Euro 370 million will be 
 
"fresh" money, with the remaining funding coming from low- 
 
interest loans and GoA guarantees for investments and 
 
R&D.  The GoA expects these measures will encourage 
 
additional investments of up to Euro 3 billion, create up 
 
to 20,000 new jobs, and raise GDP growth by 0.1% in 2005 
 
and 0.3% in 2006.  The GoA will finance the package from 
 
budgeted labor market reserves, thus avoiding any further 
 
increase in the 2005 and 2006 federal deficits. 
 
Targeting the long-term unemployed under 25 years of age 
 
and over 45, the GoA also announced plans to introduce a 
 
combination-wage model in 2006.  The "combi-wage" will 
 
provide additional payments of up to Euro 1,000 per month 
 
for low-paid jobs. 
 
Rising Unemployment, Yet Record Employment 
 
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4.  The number of unemployed during January - July 2005 
 
was 4-5% higher than in the comparable 2004 period. 
 
However, employment figures continue to reach new records 
 
every month, as total employment has grown 3.3% since 
 
2000.  Factors contributing to record numbers in the 
 
workforce include the following: a continued influx of 
 
labor from other EU-15 nations, especially Germany; 
 
growing numbers of illegal workers from Central and 
 
Eastern Europe; and pension reform, which raised the 
 
retirement age (ref A).  Low growth rates since 2000 have 
 
also dampened job creation. 
 
No Further Tax Cut 
 
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5.  The opposition SPO continues to call for a tax cut 
 
for low-income groups.  The GoA's tax cuts, effective 
 
January 1, 2005, provided tax relief of Euro 1.1 billion 
 
and higher allowances of Euro 250 million (ref B), 
 
primarily for low-income earners.  Competing for support 
 
in the run-up to the 2006 elections, the junior coalition 
 
partner, the Alliance Future Austria (BZO) has also 
 
argued for further tax relief.  However, Chancellor 
 
Schuessel and Vice-Chancellor Gorbach (BZO) agreed that 
 
further tax cuts would be a subject for the next 
 
parliament to consider. 
 
Limited But Positive Impact 
 
--------------------------- 
 
6.  Opposition parties characterized the GoA's employment 
 
package as a "propaganda show" and criticized the GoA for 
 
its failure to create jobs.  Economists generally praised 
 
the GoA measures, but have cautioned that the GoA has 
 
overstated the package's simulative effect.  According to 
 
the Austrian Institute for Economic Research (WIFO), the 
 
GoA's previous three economic stimulus packages (2001- 
 
2003) have had positive, but limited impact on 
 
investment, R&D and the labor market.  Research indicates 
 
that only about 50% of the funds for such stimulative 
 
measures remains in Austria, with the remainder flowing 
 
abroad.  The WIFO estimates that long-term improvement in 
 
the Austrian labor market would require a minimum growth 
 
rate of 2.5%.  Current GDP growth projections for 2005 
 
and 2006 are 1.8% and 1.9%, respectively. 
 
Comment 
 
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7.  In essence, the stimulus package totals only Euro 370 
 
million, as the majority of the Euro 1.2 billion amounts 
 
to a repackaging of already existing investment loans and 
 
GoA guarantees, which Austrian business has not fully 
 
utilized to date.  Since 40% of all Austrian workers no 
 
longer pay any income tax, the SPO's call for tax relief 
 
for low-income groups would amount to a so-called 
 
"negative tax," i.e., cash grants for low-income groups 
 
that are currently not paying taxes.  Moreover, as 
 
Schuessel's chief economic advisor publicly noted, the 
 
additional consumer spending that a further tax cut would 
 
encourage would provide marginal benefits to the economy. 
 
Much of the money would be spent on imported consumer 
 
goods and abroad, for example, on vactions. 
 
van Voorst