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Austrian States Brief: Tax Shortfalls Increase Budgetary Pressures

This report does not constitute a rating action.

The official projection of Austrian states’ shared tax allocations has been revised downward by €1 billion to €1.5 billion per annum over 2025 to 2027. The decline is the result of two consecutive years of recession and the effect of federal tax reform in 2024. S&P Global Ratings calculates the reduction at about 4.5% to 6.3% of the total distributable taxes shared by the states, making it a significant reduction in their most important revenue source.

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What's Happening

Austria's economy is navigating a challenging period characterized by fragile growth prospects that have weighed on forecast tax revenues. The outlook could be further complicated by fiscal and economic policy uncertainty, including due to:

  • The delay in forming a new federal government, following the September 2024 elections. Austria has yet to finalize the form and scope of budgetary consolidation (required to avoid triggering an EU-mandated excessive deficit procedure), which could affect the pace and strength of a possible economic recovery.
  • Potential adverse developments in international trade, particularly regarding protectionist policies that could endanger Austria's economic recovery and extend the current period of stagnant growth.

Why It Matters

Shared taxes account for more than 40% of Austrian states’ total revenues and states have limited options, on the revenue side, to compensate for shortfalls. State-level taxes are comparatively less significant contributors to revenues, while federal transfers (which are states’ second largest revenue item) are substantially fixed by mechanisms such as the “Fiscal Equalization Agreement”.

Demographic trends and lagged cost increases (associated with higher inflation in recent years) have increased expenditure at the subnational level--particularly in health care and social welfare. Most state governments have announced plans to contain expenditures and rebalance budgets, though structural reforms are unlikely to produce immediate effects. Meanwhile, a prolongation of the prevailing economic stagnation might exacerbate revenue pressures and could delay a return to more balanced budgets.

What Comes Next

Over the next few years, Austrian states will likely face significant budgetary constraints due to the combination of sluggish growth in shared tax revenues and increased transfers and subsidies to lower government tiers and public-service providers--especially in the areas of healthcare, education, and social care.

We continue to expect individual states to pursue budgetary consolidation and efficiency reforms in order to comply with national fiscal rules, though the range and extent of initiatives remain uncertain. The scope and pace of individual states’ consolidation and reforms will determines the extent of expenditure containment, while delays could lead to a much-slower-than-expected pace of deficit reduction.

Deficit reduction delays could be exacerbated by a prolonged economic recession, more aggressive budgetary consolidation at the federal level, or the adverse effects of protectionist policies on the national economy. Lower-than-anticipated growth that increases revenue shortfalls could trigger a damaging cycle characterized by deficits (that are larger than our current forecasts) and increased pressure on fiscal performance. In that event, Austrian states’ fiscal position could deteriorate in the absence of compensating savings or ad hoc transfers from the federal government.

Related Research

Primary Contact:Raphael Robiatti, Dr., Frankfurt 49-173-701-6203;
raphael.robiatti@spglobal.com
Secondary Contact:Michael Stroschein, Frankfurt 49-693-399-9251;
michael.stroschein@spglobal.com
Analytical Group Contact:Sovereign and IPF EMEA,  ;
SOVIPF@spglobal.com

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