Can Austria finally break out of its structural stagnation?

Austria’s political debate has finally begun to move again, prompted by Chancellor Christian Stocker’s proposals for a pension fund and a future fund for children. That is welcome, even if neither idea can solve the problems it targets by itself.

A state pension fund, as Stocker has proposed, would be too small and too long-term to close the pension gap. A tax-advantaged fund allowing families to invest 5,000 euros per child each year would not resolve the main pressures facing families either, particularly the shortage of childcare. Still, both proposals address two major failures: pension costs that continue to expand and a deep reluctance among Austrians to participate in capital markets.

That reluctance, the commentary argues, has kept much of the population away from the stock-market boom of recent years. It has also made it harder for Austrian companies to raise capital. A state pension fund invested in the capital market could create a shift in perception, as could allowing people to invest smaller sums in shares and funds without capital-gains tax or fees.

The scale of Austria’s social-spending problem is visible in the figures. Social expenditure now equals 33.4% of economic output, making Austria’s welfare system the most expensive in the world, and the ratio continues to rise. In 2000, it stood at 26.9%. If spending had risen only in line with the economy, the social-spending ratio would have remained unchanged and expenditure would now be about 33 billion euros lower.

The increase has not mainly come from social assistance or unemployment benefits. Almost all of it comes from two areas, including pensions, whose share of social spending rose from 40.4% to 46.1%. The argument is therefore not that Austria has undergone welfare retrenchment, but that it has experienced massive welfare expansion. That leaves room for reforms without pushing the country into poverty.