Towards a political economy of zero budgeting in Austria

The EMU sets new standards for public finance. In particular, the Stability and Growth Pact aims at a budget "close-to-balance or in surplus". Austria is lagging behind in this respect. First, this paper discusses the reasons for that. Then, two scenarios of budget consolidation are analyzed with the Wifo macroeconomic model. In the case of the crash-scenario, which balances the budget already in 2002, the pure Keynesian solution would result in a decline of real GDP of 1% after six years. The precautionary consolidation scenario (balanced budget in ten years) would result in a real GDP loss of only 1/2%. With supply-side effects (incentives for investment due to privatization and UMTS licences sales or credibility effects), real GDP declines only by 1/3% in both scenario. Taking a consolidated view of the tax reform 2000 and the budget consolidation, on balance, the overall effects are rather positive than negative.