Negotiations Begin for New Stability Pact in Austria

Starting next week, negotiations will commence for a new Austrian Stability Pact, which primarily focuses on the allocation of permissible deficits among various government entities. It is crucial to note that this is distinct from the financial equalization process, which addresses the distribution of tax revenues. The current Stability Pact, established in 2012, is regarded as outdated and requires revision in light of updated EU fiscal regulations.

The initial phase of discussions is expected to remain relatively professional, as negotiations will initially take place at the bureaucratic level, with political leaders likely becoming more involved later in the process. A realistic conclusion to these intricate talks may not occur before September. The upcoming conference of state governors will likely consider the Stability Pact as a secondary topic.

All parties involved--the municipalities, cities, and states--are expressing a strong desire for improved conditions in any new arrangements. Municipalities and states have articulated their need for better outcomes in the ongoing discussions. The Finance Ministry has thus far maintained a diplomatic stance, indicating that the federal government is addressing the state budget's restoration through the dual budget. The next steps toward overall national financial consolidation are now the focus.

The last Stability Pact, implemented in 2012, stipulated that the overall structural deficit should not exceed 0.45 percent of the GDP. For states and municipalities, this figure was capped at 0.1 percent, while the federal government was allowed a maximum of 0.35 percent. However, the projected deficit for 2024 stands at a significant 4.7 percent, with targets of 4.5 percent for the current year and 4.2 percent for the following year, highlighting the considerable gap from the original fiscal goals. The exceptional period during the pandemic, when these guidelines were suspended in accordance with EU stability criteria, has long since passed.

The budget currently being discussed anticipates that the federal government will record a deficit of 3.5 percent this year and the next, while states and municipalities are expected to reflect a deficit of 1 percent in the current year, decreasing to 0.7 percent by 2026.

Importantly, the Stability Pact does not prescribe specific measures for achieving the allowed deficits; it is up to the respective government entities to determine how to meet these targets. In simpler terms, achieving a favorable position in the Stability Pact results in greater flexibility for individual budgetary decisions.

As of last year, new fiscal rules have been established within the EU, requiring member states to present national plans outlining strategies for debt reduction. This reform aims to provide member states with additional flexibility and time to consolidate their budgets, necessitating an update to the Stability Pact. The corresponding directive must be implemented by member states by the end of this year.