Austrian Finance Minister Dr. Magnus Brunner gave iGlobenews an exclusive interview and answered our questions regarding Austria’s Raiffeisen Bank International, the banking crisis, European and Austrian inflation, and Austria’s fiscal policy. Minister Brunner also discussed his Budget for 2024 and the use of AI in his Ministry. Finally, Minister Brunner shared his thoughts on the feasibility of an EU-wide tax regime and his skepticism to an EU-wide Asset Registry for all EU residents.
Austria’s Raiffeisen Bank International
iGlobenews: The Austrian Raiffeisen Bank International is under scrutiny by the US DOJ and in danger of secondary US sanctions. The Raiffeisen Bank, the holding parent of Raiffeisen Bank International, is a system relevant bank for Austria. How is Austria protecting its interests and sovereignty with regard to US long-arm jurisdiction? Must Austrian businesses and banks who continue to have business interests in Russia fear secondary US sanctions?
Minister Brunner: The RBI has reduced its lending business with Russian borrowers as much as possible in recent months. The remaining business is carried out in strict compliance with the imposed sanctions, whereby providing payment services is also in the interest of Europe.
Of course, the bank, like everyone else, has to comply with laws and sanctions. It is also not sanctioned itself. Management is currently reviewing options up to and including a potential sale.
Nevertheless, RBI has also reduced the volume of payment transactions over the last weeks.
Without the possibility of paying for those resources that the EU has exempted from sanctions for good reason in the interest of the European economy, their import would otherwise come to an end.
From my point of view all banks (European or American) with business relationships with Russia should be treated equally and there are numerous European banks that operate legally in Russia. With all this being said, it is crucial for us that all sanctions are observed.
The Banking Crisis
iGlobenews: In your opinion, what role have the EZB and Fed played in this banking crisis by refusing to raise interest rates in the past? How are European banks doing? Are any Austrian banks at risk of default?
Minister Brunner: Inflation is now challenging the advanced world, after remaining a non-issue for decades. The sharp rise in inflation has required fiscal and monetary policy to become more restrictive, irrespective of the underlying economic conditions. Zero interest rates and quantitative easing are a thing of the past, but there is little experience with policy normalization after such a long period of accommodation, let alone in a period affected by multiple watersheds.
Of course, recent developments have shown that the banking sector is also not spared from the global upheavals. EU banks have remained resilient, thanks to the efforts in the aftermath of the 2009 financial crisis, but vigilance is still important.
Regarding the Austrian banking sector specifically, I can say unequivocally: According to experts, the current events have no impact on the Austrian financial market. Also because the banking sector did its homework after the financial crisis. Hence, why the experts do not see any immediate effects on Austria. In any case, the Austrian financial center is thankfully safe.
European and Austrian Inflation
iGlobenews: Austria has an all-time high inflation which lies above the European average. According to the Wifo, Austria’s inflation for 2023 will be above its original prediction of 7.1%. In your opinion what are the main causes driving inflation? How has the war in Ukraine acted as an inflation driver?
Minister Brunner: According to the latest estimations, inflation in Austria was 8.8% in May, the lowest level since last June. This drop in inflation of almost one percentage point is very encouraging. Nevertheless, this value is still too high and we must continue to do everything we can to ensure that this trend is now sustained and inflation continues to fall. We must therefore successively reduce demand-raising measures and at the same time take the effects on inflation into account even more than before in all measures – also to support the EZB in the fight against inflation.
Russia’s war of aggression acted as the primary driver of the all-time high inflation in the past months. In particular, the increase in wholesale prices of raw oil and natural gas drove consumer energy prices and so inflation. Before February 2022, the increase in consumer prices stemmed from supply and demand miss matches originated from the COVID-19 pandemic, albeit to a smaller extent. Recently, wholesale energy prices decreased significantly. The reasons for still elevated inflation are indirect effects coming from this energy prices shock, like higher production costs and higher increases in wages interlinked with a tight labour market. This also explains why the service sector is currently the biggest driver of inflation.
iGlobenews: What measures do you propose to stop inflation? Why is Austrian inflation consistently higher than the European average and in Germany?
Minister Brunner: First of all, I want us to consider that in the previous year, Austria’s inflation was below the EU average, this year we are just slightly above it. With this being said though, fighting high inflation is a complex matter. Austria decided to rely foremost on income support measures instead of price measures. This allows to keep the price signals working. It is of high importance to support the most vulnerable groups in a target-oriented way. At the same time, fiscal sustainability must be guaranteed. In the last months we have seen a strong price increase in services, especially in the sector of restaurants and hotels. This sector has a strong weight in the Austrian HICP basket of goods, at 15.8%, whereas in Germany, it accounts for only 7.2%. Therefore, the effect is stronger in Austria. Also the wage settlements in Austria are higher than in the rest of the EU.
I have always emphasized that we must take measures that have the effect of reducing inflation. The Federal Government’s previous support measures for people, households and businesses were important because they had a stabilizing effect on consumption and income. However, we must now do even more to lower inflation by gradually reducing our expansive spending policy, fight inflation with direct price-dampening measures such as continuing to lower energy taxes and curbing public prices, and strengthen competition through more transparency in order to compensate for the falling wholesale prices to be felt by the consumers
iGlobenews: In Austria, the cost of food has risen on average 14.5% which is even higher than Austria’s inflation. What role do increasing energy costs, high cost of labor and the over-regulation by the EU play in inflation and high cost of food in Austria?
Minister Brunner: It is higher than aggregate inflation, but compared with the EU-27, where inflation on food stood at 19.2% on average in March, Austria has one of the lowest inflation rates in this sector (e.g.: inflation in the food sector in March was higher in Germany (21.8%), Hungary (44.8%), Spain (16.5%) and Sweden (20.2%)). Prices are driven by energy costs and labour shortages, which increase cost of labour.
As a side note: The Austrian Ministry of Finance is aware of comparably high domestic labour costs, as the Austrian tax and contribution rate ranks above the OECD average. It should be clarified though, that the “tax wedge” weighs significantly lower than the SSC rate. Specifically, in the course of the year 2022 Austria further reduced the tax burden on labour, in particular by the reduction of the 2nd and 3rd income tax rate:
The 2nd income tax rate was originally 35 % and now since January 2023 is 30%.
The 3rd income tax rate was originally 42%, currently resides at 41% and will even be lowered to 40% as of January 2024.
The 1st income tax rate has already been reduced in 2020 from 25% to 20%.
Moreover, with effect from 2023 onwards, “bracket creep” has been abolished in Austria, as the income tax scale and major tax credits are indexed to inflation to the extent of 2/3 of the inflation rate; 1/3 of the overall fiscal volume generated by inflation remains to the legislator to set discretionary measures that, according to the prevailing economic and social necessities, target particularly adversely affected groups such as low-wage earners or middle class employees
iGlobenews: During COVID the Austrian government spent billions supporting the economy and jobs. New subsidies were created to help many people and businesses through the pandemic. How much did the Austrian government pay out in COVID-related subsidies?
Minister Brunner: As of the end of April 2023, federal budget expenditure summed up to 44.0 bn € in total. This includes only expenditure provided by the federal government and neither takes into account tax reliefs and guarantees, nor any support measures by states, municipalities or the social security sector.
From a budgetary perspective, the largest measures are subsidies for companies paid out by COFAG (15.3 bn € incl. guarantee claims and administration costs), the Corona short-time labour scheme (9.8 bn €), health-related measures (in total 9.2 bn €), financial support for self-employed, entrepreneurs, small/micro businesses, agricultural and tourism businesses (in sum 2.6 bn €), an investment package for municipalities (1.0 bn €) and financial support for non-profit organizations (0.8 bn €).
iGlobenews: You support a market economy and have stated that you do not want to prolong COVID-related handouts. Do you see a wave of bankruptcies in Austria now that companies will no longer receive government COVID subsidies? And in this connection, how is your Ministry pursuing the return of millions COVID-related subsidies paid out without a legal basis? How much have these wrongly distributed COVID handouts cost the Austrian tax payer?
Minister Brunner: Thanks to the general resilience of the Austrian economy, but also due to the comprehensive support provided by the government, and ultimately, by the tax payer, many enterprises have managed both crises very well, which is also reflected in the labour market and the low level of bankruptcies in the past years. Thus, while bankruptcies are now back to their pre-crisis-level, there is no reason for alarmism. However, we monitor the situation closely.
Regarding the return of subsidies, it is important to note that all payments were done on a legal basis and carried out as quickly as possible. Now, some aspects of state aid law might lead to reclaims. I’d like to state that the COFAG is now verifying all potential reasons for reclaims of subsidies paid out and is getting in touch with the affected companies. Our aim is to minimize the cost for Austrian tax payers. Where aid was wrongly obtained, it will be reclaimed.
Furthermore, the exchange between the EU Commission and the Federal Ministry of Finance on state aid issues is still ongoing, so no final scenarios have been clarified or named at this point in time. The exchange is very constructive though and both the BMF and the EU Commission are trying to find a solution that meets all the requirements of state aid law
Austria has also adopted a series of tax measures to address the exceptional circumstances caused by the pandemic. Retrospectively, tax measures contributed prominently to soften the adverse consequences the population, labour force and economy had to endure. For instance, Austria made use of tax deferrals on an extensive basis, but nevertheless drew deferrals to an end by June 2021. In order not to “overwhelm” companies by the reclamation of deferrals, a specific “payback scheme” has been implemented. The vast part of other tax-related COVID-19-measures were equally terminated in 2021. In doing so, tax policy experts cooperated closely with the European Commission and the competent authorities in the field of subsidies in order to ensure an aligned phasing-out.
Budget for 2024
iGlobenews: In order to start balancing the budget, you have presented a plan to curb spending. In addition to stopping the COVID-related subsidies, what other measures are you proposing to cut government spending and reduce government debt?
Minister Brunner: Besides COVID-related expenditure also financial support measures related to the energy crisis and high prices in general are gradually phased out once the situation has calmed down. This on its own will ease budgetary pressure significantly. According to our latest forecast presented in the recently published Stability Programme 2022-2026, the budget balance will improve substantially in 2024 and the public debt ratio will continue to fall throughout the end of the forecast horizon in 2026. Thus, we do not need to cut government spending radically, but instead set clear priorities in the future. In this respect, we have to be realistic insofar as the demographic change will increase expenditure for areas like pensions, health and long-term care in the future. Moreover, we need to address the other challenges of our time – national defence, climate change, digitalization.
With this being said, my job as Minister of Finance is and remains to keep an eye on long-term developments and the budget. Because falling deficits and a further decline in the debt ratio are important in order to create scope for upcoming generations and to remain crisis-proof in the future. At both European and national level, it must be a question of putting budgets back on a sustainable path and at the same time strengthening the competitiveness of Europe as a business location.
My goal is for Austria’s deficit to be well below 3% of GDP by 2024. This is a clear signal for compliance with European rules and for the financial markets. We want to halve the deficit in order to put Austria on a sustainable budget path in the medium term. It is also clear that you don’t ruin a budget in crises, but rather if you don’t pay attention to sustainable budgets in good times.
iGlobenews: Your coalition partner, the Green Party, does not agree with your budgetary measures. Instead, the Greens wants to continue subsidizing the high cost of energy and support investments in green energy with more government spending. How much will this cost the Austrian tax payer and do you support this?
Minister Brunner: To be clear, there is consensus between the coalition parties that we need to cushion the impact of high prices in general in order to stabilize the purchasing power of private households and to secure international competitiveness of Austrian firms. There is also broad agreement that we must strengthen Austria’s energy independence. In this regard, investments in green energy are beneficial in two ways as they strengthen our energy independence and are essential to achieve our climate goals.
Much of the investments costs are covered by the revenue of the renewable subsidy contribution and the renewable subsidy lump-sum, both of which are extra-budgetary. As a result of the high energy prices, both have been suspended this and last year in order to provide financial relief to households and forms. Besides that, we have substantially increased budgetary funds for the green transition in general. The current Medium-Term Expenditure Framework (MTEF) 2023-2026 foresees an increase of 4.9 bn € for the green transition and expansion of renewable energy compared to the previous MTEF 2022-2025.
Regarding measures with specific impact on energy price surges, it may be underlined that Austria reduced the electricity and gas levies to the minimum level required by EU law (corresponding to a reduction of about 90%). This measure was put in place as a component of a multiple response to the then-emerging wave of inflation in early 2022 and was limited until June 2023, but is scheduled to be prolonged until 2024.
Furthermore, oil and gas companies are subject to a “windfall tax”, provided their profit in 2022 and 2023 exceeds 20% compared to a four-year average. In that case, the gain of up to 40% is additionally levied. The provision is effective from 1 July 2022 until 31 December 2023. Regarding power suppliers, 90% of the revenue per megawatt hour that exceeds 140 euros is subject to a levy. If investments in green energy are verified, the threshold increases up to 180 euros. The provision came into force on 1 December 2022 and is limited until 31 December 2023. Due to the meanwhile decreased wholesale prices and the factor that price cuts were not passed on to the consumers to a satisfying extend, the government agreed to tighten the “energy crisis contribution” by lowering the aforementioned threshold from 140 euros per megawatt hour to 120 euros as well as the threshold of 180 euros in case of green investments to 160 euros. The revision is expected to take effect as of June 2023.
iGlobenews: The leader of the Green Party, Mr. Kogler, wants to introduce new taxes such as the “millionaire’s tax”. What is your position on increasing taxes and introducing a wealth tax (Vermögenssteuer)? Are Austrians not already one of the most highly taxed Europeans?
Minister Brunner: The strength and capability of the Austrian economy and the low unemployment rate must be preserved, especially in light of a dooming recession. The introduction of new taxes and the increase of existing taxes, respectively, are no probate means to serve these objectives, nor would such measures be in line with the bipartisan coalitional agreement, that incidentally aims to reduce the overall tax rate.
Regarding varieties of so called “millionaire taxes”, Austria has gained some experience due to the fact, that until 2008 an “inheritance tax” was levied, and a “wealth tax” was abolished in the 1990ies. Also, the analysis of models levying similar taxes has proven to be counterproductive with regard to the aforementioned objectives and, moreover, would not offer the intended revenue when compared to their administrative efforts their collection would require.
Capital gains both deriving from financial assets as well as from property sales are already under taxation in Austria. And beyond that, there are more asset-related taxes like the real estate tax, the real estate transfer tax and the real estate value tax. In addition, the top income tax rate for income above 1 million euros is 55%.
Regarding the taxation of capital assets, domestic saving and small investors should be promoted and the outflow of capital should be prevented. Models pertaining further taxation of capital assets would necessarily include business assets; this would create a massive competitive disadvantage, from which in particular small and medium corporations and companies with high equity capital requirements would suffer from. Decline in investments and reduction of equity build-up would ensue and further effect the already strained situation negatively.
EU Regulations on Taxes
iGlobenews: Do you support a European-wide uniform tax policy and tax rate, especially regarding corporate conglomerates? Would this be achievable? Should large international corporations be required to pay taxes in the countries in which they do business?
Minister Brunner: Tax rates are within the discretion of Member States. Nevertheless, Austria has always been a strong supporter of a global minimum tax on international and also on EU level. Against this background, Austria has always been actively involved in elaborating proposals and making efforts to promote fairness of taxation, to close tax loopholes and to reallocate international rights of taxation. An example for this is our approach to digital taxes:
In order to ensure more tax equity between national and international providers, Austria has been levying a digital tax on online advertising services since January 1, 2020 as an interim solution until a global consensus is reached. In the first year, this brought us 43 million euros, in 2021 it was 80 million euros, in 2022 a total of 96 million euros. 120 million euros are forecast for 2023.
With the breakthrough on the Pillar II proposal of the OECD and the following agreement on the Pillar II directive on EU level an important step has been made to curb harmful tax competition and to make sure that international conglomerates pay their fair share of taxes.
iGlobenews: There are preparations under way for an EU-wide Asset Registry for all EU residents (Vermögensverzeichnis). Do you support this? Are we becoming a completely transparent society where everyone (even those with ill intent) can easily discover how much someone owns and where exactly these assets are located? How is this EU Asset Registry compatible with privacy rights, an oft-proclaimed value of the EU?
Minister Brunner: We are rather skeptical of such an initiative as such a project would lead to numerous legal issues (Union competence in this matter, fundamental right to privacy, data protection). It would also be extremely difficult to connect yet existing registries in the 27 Member States, especially in the field of land register law, the registers tend not to be comparable. In addition, the principle of the proportionality of such a project needs to be weighed against the expected added value.
Use of AI in the Finance Ministry
iGlobenews: Finally, does your ministry intend to use AI or artificial intelligence software to support certain processes or systems in the Finance Ministry? Do you have any specific information to share on AI application in your Ministry?
Minister Brunner: Above all, AI will help to automate routine tasks – for example, to create invoices or post receipts. In addition, further developed AI programs can help us to find the relevant test and control cases and save us work here too.
And last but not least, self-learning technology can further improve our chatbots, answer questions with better quality or provide the right information quickly. This will make things easier and maybe some work will no longer have to be done by people.
As of today, we are already experiencing huge success in this domain of e-Government systems with our online platform “FinanzOnline” which allows Austrian citizens and entrepreneurs electronic access to the financial administration with just one mouse click. The user numbers with more than 5.6 million users shows that we are on the right path here.
For the specialized tasks in the area of financial management, where special experience and professional expertise is required, our employees will still be needed. However, they can then also carry out more meaningful activities – which makes us attractive as an employer again.