Austria: Persistent Fiscal Pressures Coupled With Weak Growth Challenge Resilience to Future Crises

Improving the sustainability of Austria’s debt burden is important to build resilience against future crises. The recent series of external economic shocks, including the pandemic, the escalation of Russia’s war in Ukraine and the economic slowdown among some important trading partners, has accelerated the structural weakening of Austria’s economic growth and government finances.

Scope Ratings (Scope) expects the economy to stagnate in 2025 after two years of contraction. Economic output stood just 1.7pps above pre-Covid levels as of Q2 2025, a level well below the euro area averages of +6.5pps and near the bottom of Austria’s sovereign peer group (Finland is at +0.7pps).

Austria’s export-oriented industries, including automotives and steel, remain vulnerable to volatile energy prices and higher tariffs amid heightened tensions in US-Europe-China trade relations. Scope expects economic growth to average around 1% a year over the next five years, well below the 2% in the five years before the pandemic.

Austria’s public finances reflect a combination of lingering strains the economy and growing structural pressures on government expenditure. The fiscal deficit of 4.7% of GDP last year was Austria’s third-highest annual figure since 2006, only exceeded during the global financial crisis in 2009 and the 2020-21 pandemic crisis peaks.

Cost-of-living pressures and spending increases linked to an ageing population will likely lead to continued high primary budget deficits, unlike the two decades leading up to the pandemic when successive governments recorded moderate headline deficits and regular primary surpluses during the non-crisis years (Figure 1).

Figure 1: Austria’s growing structural pressures expected to lead to a rising public debt ratio

General government debt/GDP, % (lhs); primary and headline budget balances, % of GDP (rhs)

Further Consolidation Efforts Needed to Stabilise Government Debt Trajectory

Scope estimates that the government will save only around EUR 10.6bn of a projected EUR 14.6bn in coming years. If so, the government will miss its 3%-of-GDP deficit target by 2028. General government debt is set to rise gradually to 88% of GDP by 2030, up from 82% in 2024 and well above the peer-sovereign averages of around 60%.

The EU placed Austria under an Excessive Deficit Procedure (EDP) in early July, with a recommendation to reduce net expenditure growth and meet the 3%-of-GDP deficit target by 2028. The Austrian government had submitted its Medium-Term Structural Fiscal Plan to the European Commission in May, which outlined EUR 14.6bn of required consolidation by end-2029 to stabilise the debt trajectory. However, based on progress to date, full implementation looks challenging amid continued high spending pressures (Figure 2), not least to offset weak economic activity.

The pressure Austria is under from Brussels to improve its fiscal position contrasts with sovereign peer Finland, which avoided an EDP as the country’s higher defence spending was taken into account. Still, Scope revised Finland’s sovereign credit Outlook to Negative on 1 August reflecting the country’s weakening fiscal prospects.

Figure 2: Austria risks falling behind on its fiscal consolidation goals
Volume of consolidation effort (EUR bn)

Source: Fiscal Advisory Council (Austria), MoF, Scope Ratings.

Structural Nature of Rising Public Spending, Inflation Complicates Efforts to Tighten Expenditure Controls

Growth in Austrian public spending last year (up 8.7% from 2023) continued to surpass increases in revenue (up only 4.9%) as higher welfare and public-sector wage costs offset the phase-out of most measures designed to protect households and business from the cost-of-living crisis.

Austria’s budgetary challenge partly stems from fiscal slippage at the provincial and local levels. Planned consolidation over 2025–2026 relies mainly on cuts to state, local and social security budgets; the central government’s deficit is expected to remain stable. However, sub-sovereign governments also face fiscal pressures, notably from high staffing costs.

Structural spending related to Austria’s ageing population represents longer-term pressures on public finances, the response to which will require streamlining healthcare services and further pension reform. The government estimates that pension costs will rise to EUR 38.2bn (6.7% of GDP) in 2029 from EUR 30.0bn (6.2% of GDP) in 2024.

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Eiko Sievert is an Executive Director in Sovereign and Public Sector ratings at Scope Ratings. Elena Klare, analyst in sovereign ratings at Scope, contributed to drafting this research.