1ETUC Conference: 1-2 March 2005 Macroeconomic Policy Making: Lessons from Austro-Keynesianism Franz Nauschnigg

2ETUC Conference: 1-2 March 2005 Outline The main features of Austro-Keynesianism Austro-Keynesianism and EU-membership Innovative expansionary demand management measures Economic results of Austro-Keynesianism - unemployment, growth From Austro-Keynesianism to neo liberal paradigm Economic results of neo liberal paradigm - unemployment, growth Conclusions

3ETUC Conference: 1-2 March 2005 Austro-Keynesianism 1970s/80s: Replacing the Keynesian demand management by monetarist and neoliberal economic policies almost everywhere in the western world! Everywhere? NO! A small country - Austria - remained wedded to Keynesian thinking: „Austro-Keynesianismus“

4ETUC Conference: 1-2 March 2005 Austro-Keynesianism – main features Counter cyclical demand management - fiscal policy Orthodox hard currency policy peg to DM Supply side policies - especially incentives for investment Strong role of social partners - productivity oriented wage policy Stabilisation of expectations of economic agents Combined use of policy instruments

5ETUC Conference: 1-2 March 2005 Austro-Keynesianism and EU-membership EU-Membership in a big challenge for Austro- Keynesianism Biggest structural reform - short term adjustment costs, long term benefits come only later (J-curve) Budget deficit 5,3% of GDP had to be brought down fast for EMU membership - fulfilling the convergence criteria Room of manoeuvre for fiscal policy limited by EU framework

6ETUC Conference: 1-2 March 2005 Innovative expansionary demand management measures in Austro- Keynesianism Combining restrictive fiscal policy 100 bn ATS (7,2 bn € over 3% of GDP) with supply and macro policies: –Increasing the tax rate on interest income –Lowering subsidies for saving and linking it to interest rates –using tax exemptions in the housing sector by spending existing reserves Innovative expansionary package in 1996: –90 bn ATS (6,5 bn €) Shifting of public investment to the private sector A particular sort of public private partnership (PPPs) - creating private entities owned by the state

7ETUC Conference: 1-2 March 2005 Advantages of PPP demand management Treating investment differently - depreciation over lifetime Gaining efficiency and flexibility No increase of the budget deficit Low financing costs combination of the strength of the private and public sector  combination of fiscal consolidation and growth

8ETUC Conference: 1-2 March 2005

9 GROSS DOMESTIC PRODUCT PER INHABITANT (in Purchasing Power Standards) EU-15= 100

10ETUC Conference: 1-2 March 2005 From Austro-Keynesianism to neo liberal paradigm Social democrats lost power (2000) Austro-Keynesianism replaced by neo liberalism IMF (2004):“Since the turn of the decade, a strategic policy shift has made Austria a showcase of reforms and placed it at the forefront of the EU (in terms of implementing the Lisbon-Agenda).“

11ETUC Conference: 1-2 March 2005

12ETUC Conference: 1-2 March 2005

13ETUC Conference: 1-2 March 2005 Economic results of the neo liberal paradigm Increase in unemployment – faster than EU-average –from 3,7% in 2000 to 4,2% in 2004 Weak growth performance - Contrary to IMF prognosis –Austrian GDP per capita (PPS) from 114% of EU-average in 2000 to 110% in 2005 Austrian budget deficit no substantial changes –forecasted to increase to 2% in 2005

14ETUC Conference: 1-2 March 2005 Conclusions Structural reforms bring with them short term costs, the benefits are higher only in the long term - J curve effect Microeconomic reforms should therefore be supported by expansionary macroeconomic policies Innovative demand management policies e.g. PPP demand management, countercyclical use of the tax system and of subsidies In terms of growth and employment Austro-Keynesianism was more successful than the current economic policy approach of Austria