Wifo Director Acknowledges Wage Restraint in the Industrial Sector

The Director of the Austrian Institute of Economic Research (Wifo), Gabriel Felbermayr, expressed support for the recent collective agreement in the metal industry, which has been made in light of inflationary pressures. He noted that this agreement is a positive development for the country's economic landscape and demonstrates the effectiveness of social partnership, despite the prolonged negotiations that took place behind the scenes between employers and unions.

Felbermayr commented during a recent press conference that the implications of this agreement for other collective bargaining negotiations are likely limited, as the current industrial environment is characterized by high energy costs and a significant reliance on exports. As new discussions begin regarding public sector salaries, he cautioned that excessive wage restraint could be counterproductive, especially in critical areas such as public safety, where recruitment challenges could arise.

As negotiations unfold in the public sector, there is a focus on maintaining salaries below previously agreed levels, with the hope of achieving modest increases in subsequent years rather than facing a wage freeze. Felbermayr acknowledged the difficult balance required to manage public sector budgets, emphasizing that the burden of budgetary adjustments often falls on public employment.

Looking ahead, Felbermayr characterized 2025 as a year of stagnation following two consecutive years of recession, with only a slight economic recovery anticipated for the coming year. He indicated that the current growth of Gross Domestic Product (GDP) is notably slower than previous years. The end of the electricity price cap is expected to contribute to rising inflation rates, although he defended the temporary price intervention as a necessary measure during the peak inflation period triggered by energy price surges.

In terms of food prices, Felbermayr suggested that reducing VAT on essential goods could be a potential strategy, pointing to successful examples from other EU countries that implement lower tax rates on food items. He advocated for the government to engage with major supermarket chains to establish an agreement ensuring that any tax reductions are passed on to consumers. He referenced Germany's successful VAT reductions during the COVID-19 pandemic as a relevant case.

Regarding Austria's fiscal situation, Felbermayr expressed skepticism about the government's goal to reduce the budget deficit to 4.5 percent, describing the situation as fragile and highlighting that the deficit remains well above the Maastricht criteria of 3 percent. He warned that the country is approaching a debt-to-GDP ratio of 90 percent, indicating that the current budget does not provide a sustainable foundation to withstand future economic shocks, such as those seen during the pandemic or fluctuations in energy prices.

Felbermayr raised concerns about Austria's market position and the potential for the country to face scrutiny similar to that experienced by France if current trends continue. He noted that the existing budget deficit is insufficient to adequately control national debt levels, and he did not foresee improvement in achieving the 3 percent target in the medium term, possibly extending through to 2029 or 2030.

On the subject of local governance, Felbermayr suggested that municipalities should be granted greater autonomy over their revenue sources, particularly regarding property taxes, which have not been increased in 40 years. He proposed considering a shift towards a land value tax in place of the current property tax, emphasizing the need for comprehensive reform in this area.