The tax-spend debate and budgetary policy in Austria

In the aftermath of the financial and economic crisis since 2008, governments have developed plans to steer fiscal policies back to a sustainable path. Austria is no exception since the latest 2012 consolidation package had the aim of balancing the budget by 2016. For consolidation policies, it is however of great importance which strategy the concrete steps follow. For instance, should the deficit be reduced by reducing expenditure, by increasing revenue, or by a mixed coordinated policy? Empirical evidence of the mid-1990s indicated that Austria’s policy makers have followed a path according to the spend-tax hypothesis, deciding upon expenditure and then caring about the funding of public tasks. Since 1995, the year of Austria’s accession to the European Union, fiscal policy frameworks have changed, and thus budgetary policy might have changed as well. The current paper provides additional (econometric) evidence for a stable spend-tax fiscal policy in Austria for the last 60 years. Therefore, it seems that the importance of reducing expenditure (about 72% of the total consolidation volume in the current package) accounts for this principal approach in Austrian fiscal policy making. However, it has to be further explored whether the increase in revenues (about 28% of the total consolidation volume) might be counterproductive for sustainably balancing the budget. The current paper has thus emphasized that – from an empirical point of view – Austrian fiscal policies have followed the spend-tax hypothesis, meaning that public tasks and, subsequently, public expenditure have been decided upon earlier compared to the potential funding sources for these expenditures. Merely increasing revenues to balance the budget would thus be an inadequate policy since budgetary policies are highly determined by decisions upon expenditure. Since the current paper has provided strong indications that policy makers determine expenditure earlier than funding sources for these expenditures, the actual consolidation package and path by the Austrian governments seems to consider this line of fiscal policy decision making.