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Austria to embrace austerity to safeguard AAA-rating

Michael Spindelegger, vice chancellor and foreign minister of Austria, emphasises the country must “do everything” to protect its rating

Michael Spindelegger, leader of the Austrian People’s Party – the junior member in the ruling coalition – spoke on the importance of fiscal prudence and Austrian perceptions of the eurozone crisis, in a lecture at the London School of Economics on Thursday. Prominently, he outlined the importance of debt reduction for Austria and a concern that Italy was taking only “isolated measures” to reform its finances.

Spindelegger emphasised that Austria’s performance through the last few years of financial instability was favourable, and that the country was well on the way to full economic recovery.

“Austria has done quite well and recovery is good," he says. "External demand has set the stage for a swift recovery.”

However, Spindelegger was also keen to point out that Austria still needed to implement various reforms before he would be satisfied with its fiscal state. He pointed to a debt-to-GDP ratio of around 74% – modest in comparison to a number of European countries – as a figure that needed improvement.

“A debt rate of 74% is not the end of the story," he says. "We must reduce our debt every year.”

Spindelegger pointed to three areas considered to be most in need of reform: retirement, healthcare and state subsidies. The IFS has already criticised the Austrian government for a “lack of ambition” in reforming these areas.

Retirement reform is a particularly pressing issue in Austria. The country has a higher prevalence of early retirement than most, with around 72% of pensions granted in 2010 being given early. Spindelegger stressed he did not believe such costs to be sustainable, particularly with the retired population scheduled to increase dramatically from 2020 onwards.

Austria has proportionally one of the highest healthcare budgets in the OECD, with around 16% of the budget being allocated to healthcare. While Spindelegger did not directly suggest that a reduction in funding would be necessary, he did warn that “maintaining standards will be harder in the future”.

State subsidies to industry make up the third area that the IFS outlined as problematic. With 6% of the budget used on subsidies standing at 2.5% higher than the European average, it represents an anomaly for the region.

Spindelegger was clear that the debt and deficit reduction that Austria is expected to embark upon is important towards maintaining its AAA-rated status, something that many other European countries are struggling – or have already failed – to do.

“We have to do everything to keep our AAA,” emphasises Spindelegger.

He added that other European countries may be wise to take a page out of Austria’s book and engage in a campaign of fiscal reform to stabilise their economies.

“Portugal and Ireland are in the programme and are doing a good job. We must convince Italy to do it in the same way, even if they aren’t on the programme now,” he says.