VZCZCXRO3782
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV RUEHSL RUEHSR
DE RUEHVI #0738/01 1700928
ZNR UUUUU ZZH
R 190928Z JUN 09
FM AMEMBASSY VIENNA
TO RUEHC/SECSTATE WASHDC 2769
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCNMEM/EU MEMBER STATES

UNCLAS SECTION 01 OF 03 VIENNA 000738 
 
SIPDIS, SENSITIVE 
 
PASS TREASURY FOR OASIA/ICB/PETER MAIER 
TREASURY ALSO PASS FEDERAL RESERVE 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PGOV AU
SUBJECT: Austria?s 2009/2010 Budgets:  Fat Now, Lean to Come 
 
REFS:  A) VIENNA 0495; B) VIENNA 0642; 
       C) VIENNA 0484; D) 08 VIENNA 1287 
 
Sensitive but unclassified -- protect accordingly. 
 
¶1. (U) SUMMARY: On May 29, Austria?s Parliament adopted budgets for 
2009 and 2010, endorsing a temporary flood of red ink to mitigate 
the current economic downturn.  Total public sector deficits will 
likely exceed 4.0%/GDP in 2009 and 5.0% in 2010 (versus the GoA?s 
estimates of 3.5% and 4.7% respectively, which are based on outdated 
forecasts).  The GoA?s forecast for public debt (73%/GDP at the end 
of 2010) is also too optimistic:  the debt ratio could be closer to 
80%/GDP by the end of next year.  This cable provides a detailed 
analysis of expenditures, including defense (which will fall) and 
social welfare (which will grow substantially).  END SUMMARY. 
 
Budget Overview 
- - - - - - - - 
 
¶2. (U) On May 29, Parliament approved the GoA?s 2009 and 2010 budget 
bills (ref A) with support from the government coalition parties, 
the Social Democrats (SPO) and the People?s Party (OVP), and over 
the opposition of all other parties (the Greens, the Freedom Party 
(FPO) and the Alliance for the Future of Austria (BZO)).  The 2009 
budget shows nominal expenditures of EUR 77.5 billion ($108.5 
billion at the current exchange rate of $1.40/EUR) and revenues of 
EUR 63.9 billion ($89.4 billion).  Net of asset swaps, i.e. EUR 6 
billion ($8.4 billion) in revenues from dissolution of reserves and 
EUR 9.3 billion ($13.0 billion) in expenditures for equity 
participations in banks, the relevant federal deficit pursuant to 
EMU Maastricht criteria is EUR 9.0 billion ($12.6 billion) or 
3.2%/GDP. 
 
¶3. (U) The figures for 2010: expenditures of EUR 70.8 billion ($99.1 
billion), revenues of EUR 57.6 billion ($80.6 billion), and a 
Maastricht deficit of EUR 11.6 billion ($16.2 billion) or 4.1%/GDP. 
 
¶4. (U) The benchmark for international comparisons is the total 
public sector deficit (encompassing all levels of government, 
according to the EMU?s Maastricht definition).  A 2008 agreement 
requires provincial governments and other public bodies to render a 
surplus of 0.5%/GDP annually to offset some of the federal deficit, 
but due to the economic crisis those bodies will also run a deficit 
estimated at 0.3-0.6%/GDP.  In sum, the GoA projects the total 
public sector deficit to reach 3.5%/GDP in 2009 and 4.7%/GDP in 
2010, and says consolidated public sector debt will reach 68.5%/GDP 
by the end of 2009 and 73%/GDP by the end of 2010, with the federal 
government accounting for more than 90% of the debt. COMMENT: as 
detailed below, those estimates are far too optimistic -- END 
COMMENT. 
 
Price Tag for Fiscal Stimulus 
- - - - - - - - - - - - - - - 
 
¶5. (U) Crisis spending, tax cuts, and automatic stabilizers will 
drive up deficits sharply.  While the EUR 100 billion bank rescue 
package has had a limited budgetary impact so far, other crisis 
measures are have an immediate impact on the budgets, mostly in 2009 
but some also in 2010.  These include: 
 
-- the first economic stimulus package in late fall 2008, with 
infrastructure measures for railroads and road construction and 
subsidies, loans, and guarantees for SMEs, 
 
-- the second economic stimulus package, which moves forward GoA 
building investments, accelerates depreciation of tangible assets, 
give subsidies for thermal retrofitting of buildings, additional R&D 
funds, and funds an obligatory free Kindergarten year for pre-school 
kids. 
 
-- an income tax cut (retroactive to January 1) valued at EUR 2.3 
billion, increased family payments of EUR 0.5 billion, and measures 
for the self-employed costing EUR 0.3 billion.  As a result, half of 
Austrian wage earners no longer pay income tax. 
 
-- an EUR 220 million labor market package with measures to support 
employment and training and finance reduced-work arrangements. 
 
-- the ?cost-of-living? measures Parliament enacted before September 
2008 elections, including a thirteenth monthly family allowance, a 
higher nursing care allowance, the abolition of university student 
fees, an extension (from 2010 to 2013) of the possibility for early 
retirement without cuts in pension payments, and a VAT cut on 
pharmaceuticals from 20% to 10% -- altogether costing over EUR 1.5 
billion annually (ref D). 
 
Political Debate over Budgets 
- - - - - - - - - - - - - - - 
 
 
VIENNA 00000738  002 OF 003 
 
 
¶6. (U) Defending the budget in Parliament, Finance Minister Josef 
Proell painted the 2009/10 budgets as a decisive reaction to the 
financial and economic crises.  With a bank rescue package to 
stabilize credit markets, fiscal stimulus for investment and 
industry, and the income tax cut to strengthen private consumption, 
Proell explicitly endorsed temporarily higher deficits, but called 
on all levels of government to prepare for administrative reforms 
and cut-backs. 
 
¶7. (U) The opposition predictably panned the budgets.  Far-right FPO 
head Heinz-Christian Strache criticized the income tax cut as too 
small.  BZO (also far-right) Chairman Josef Bucher accused the GoA 
of ?flying blind? on budgets and stalling on reforms, and predicted 
a ?crash landing.?  Green party chairwoman Eva Glawischnig accused 
the GoA of exacerbating poverty and misery by not increasing 
unemployment benefits and emergency welfare payments. 
 
Line Item Highlights 
- - - - - - - - - - - 
 
¶8. (SBU) GUARANTEES:  GoA guarantees for various purposes stand at 
EUR 104 billion ($145.6 billion) at the end of 2008 (2007:  EUR 80 
billion).  The sharp increase in 2008 was primarily due to higher 
demand for export financing guarantees and guarantees for interbank 
lending and bond issues under the new bank rescue package (ref C). 
Those effects will continue and grow with the GoA?s economic 
stimulus guarantees -- the level of outstanding guarantees will rise 
further in 2009 and 2010 -- as will GoA outlays to cover more 
failures. 
 
¶9. (SBU) DEFENSE:  The MoD?s funding level in 2009 will be EUR 2.112 
billion.  While this is a nominal 3.6% increase from 2008 budgeted 
levels, in fact it represents a decline of 2.8% (EUR 61 million) 
from the actual spending level in 2008.  Defense expenditures will 
comprise around 2.7% of 2009 budget expenditures or 0.75%/GDP (down 
from 2008 actual spending of 0.77%/GDP).  For 2010, the defense 
budget is essentially flat (EUR 2.122 billion, an increase of EUR 12 
million or 0.57%).  Defense will take a slightly larger share of 
falling total budget expenditures in 2010 (3%), but stagnate in 
terms of GDP (0.75%).  At that level, MoD funding is rock bottom and 
far from the 1.0%/GDP level the Armed Forces Reform (Bundesheer) 
Commission in 2004 stated was required to adequately fund the 
Bundesheer's reform program. 
 
¶10. (U) EU Contributions:  The 2009 budget includes EUR 2.2 billion 
(2010:  EUR 2.4 billion) in EU contributions versus expected EU 
payments of EUR 1.8 billion (2010:  EUR 1.8 billion), amounting to a 
net contribution of approximately EUR 361 million (2010:  EUR 613 
million). 
 
¶11. (U) Civil Service:  The GoA will make only minimal cuts to civil 
service jobs.  Excluding employees of the federal railroads, postal 
company and other entities, the GoA has some 136,500 civil service 
jobs.  Expenditures for active personnel will total EUR 10.7 billion 
in both 2009 and 2010 (including transfers to provincial governments 
for the salaries of 67,500 teachers).  Pension expenses for the 
growing ranks of civil service retirees will be about EUR 4.3 
billion annually or EUR 7.4 billion including railroad and postal 
retirees.  Thus, total GoA personnel expenditures for active and 
retired civil service employees (including outsourced and refunds) 
will be around EUR 18.1 billion per year, equal to 23% of total 
budget expenditures in 2009 and 26% in 2010. 
 
¶12. (U) Pensions and Social Affairs:  Excluding civil service 
pension expenses, GoA contributions to the social insurance system 
for pensions should rise to EUR 7.3 billion in 2009 from EUR 6.6 
billion in 2008, and further to EUR 7.8 billion in 2010.  For labor 
market programs and unemployment benefits, the budget includes EUR 
6.0 billion in 2009 and EUR 6.4 billion in 2010, and for family 
allowances and nursing benefits EUR 8.0 billion in 2009 and EUR 8.4 
billion in 2010.  Including minor amounts for other programs, the 
GoA?s total social services expenditures, excluding civil service 
expenses, will be EUR 23.1 billion in 2009 and EUR 24.6 billion in 
2010 (2008:  EUR 21.3 billion).  In addition the GoA will spend 
about EUR 1.0 billion annually for health services and hospitals. 
 
COMMENT 
- - - - 
 
¶13. (SBU) Austria?s public deficits will be an order of magnitude 
higher than in 2008 (0.6% and 0.4%, respectively) and well over the 
3%/GDP reference value for Euro-zone economies.  Local economists 
support the current stimulus, but are concerned that the GoA has 
failed to update its projections.  The budgets are based on outdated 
growth projections of -2.2% in 2009 and 0.5% growth in 2010 (and 
unemployment rates of 5.0% and 5.3%, respectively).  Current 
forecasts see a deeper and longer recession: the European Commission 
sees -4.0% in 2009 and stagnation in 2010, while Austria?s central 
bank forecasts -4.2% in 2009 and -0.4% in 2010 (with unemployment 
 
VIENNA 00000738  003 OF 003 
 
 
rates of 5.3% and 6.5%, respectively).  Bernhard Felderer (Head of 
the Federal Debt Commission) has said Austria?s debt ratio 
(58.4%/GDP in 2008) could easily reach 80%/GDP by 2013 while GoA 
annual interest payments will top EUR 10 billion (versus EUR 7.5 
billion in 2008).  Felderer and others want the GoA to announce 
decisive spending cuts to return the debt level to 60%/GDP within 
the next five to ten years, since revenue increases will be 
problematic. 
 
¶14. (SBU) While pre-election giveaways in late 2008 softened the 
initial crisis impact, they do nothing for long-term recovery or 
productivity.  The GoA enjoys broad approval for its decisive 
economic stimulus and bank rescue efforts, but the real test will 
start in late 2010, when FinMin Proell will have to cut deficits 
dramatically and try to stop the debt ratio?s rise.  2011 will be 
particularly trying, since elections will loom larger on the horizon 
(parliamentary elections will be in fall 2013 at the latest). 
Austria?s grand coalition, which quickly united on new spending, 
will face tremendous divisions over budget consolidation since the 
SPO tends to favor new/higher taxes while the OVP leans towards 
cutting expenditures -- and unemployment will be higher than today. 
In such a trying climate, Austria?s growing opposition parties may 
grow further. 
 
ORDWAY