Austria: Elections to bring broad policy continuity, while posing downside risks to growth
Austrian People’s Party to retain place of power: On 29 September, Austria heads to the polls to elect a new lower house of parliament. Polls currently put the right-wing Freedom Party (FPÖ) in the lead, closely trailed by Chancellor Karl Nehammer’s center-right Austrian People’s Party (ÖVP) and the Social Democratic Party (SPÖ). Meanwhile, the Greens—part of the incumbent coalition—are polling at a distant fifth.
A government led by the FPÖ is unlikely: The party is not currently projected to win by an absolute majority, and other parties have rejected a coalition led by FPÖ leader Herbert Kickl, whose dismissal as interior minister caused the collapse of the 2019 government. Therefore, the incumbent Nehammer and ÖVP are likely to remain at the forefront of a new government, forming a coalition with either the FPÖ or the SPÖ and a third party.
Pro-market economic landscape on the horizon: Broad policy continuity is assured, given that the ÖVP is a shoo-in for the next government. Over the past five years, the current coalition, led by the ÖVP, has focused on pro-market economic policies, rolling out a series of reforms aimed at lowering income-tax rates on lower- and middle-income salaries. In line with this, Nehammer recently announced further tax relief measures should his party form part of the next government, envisaging the introductory income-tax rate falling further to 15.0% from 20.0% and cutting the corporate tax to 20.5% from 23.0%—0.5 percentage points below the EU average—among other broad-based tax cuts.
The FPÖ has expressed a similar stance on tax reforms, pledging a lower tax burden on corporations, savings and labor, particularly for young individuals entering the labor market. In the event that the FPÖ secures a role in the government, a bigger spotlight on immigration is likely—the party bears a more restrictive stance on asylum seekers than the ÖVP—and policy surrounding the EU and the Russia-Ukraine war will probably hamper policymaking; the FPÖ opposes any aid to Ukraine and has adopted a more aggressive stance against the EU.
On the flip side, should a ÖVP-SPÖ coalition rise to power, the ÖVP would be forced to jettison some of its tax reforms: The SPÖ has vowed to reintroduce a higher tax on corporations and increase the tax burden on the country’s highest earners to help finance tax relief measures on lower- and middle-income workers.
Economy to recover; outlook hinges on FPÖ’s role in new government: Our Consensus is for the economy to broadly stagnate in 2024 and then to return to around the Euro area average in 2025. That said, the recovery hinges crucially on the health of the German industrial sector, as the countries’ manufacturing sectors are closely integrated.
A ÖVP-FPÖ coalition could pose a downside risk for growth, as the FPÖ’s pro-Russia plus anti-EU and anti-immigration agenda is likely to be met with international backlash, potentially endangering funding and trade, and weighing on investor sentiment. Meanwhile, a rise in corporate taxation under an ÖVP-SPÖ government could hamper investor appetite.
Panelist insight: On the political outcome, Erste Group’s Maximilian Möstl and Rainer Singer said:
“Polls suggest that the right-wing Freedom Party will win these elections ahead of the centre-right Peoples Party and the centre-left Social Democratic Party. The current coalition is no longer likely to have a parliamentary majority after the elections. Based on the current forecast, it must be assumed that forming a new government will take some time, as most parties are ruling out a coalition with the Freedom Party.”
EIU analysts commented on the likely implications for government policy:
“We expect the election to result in a coalition, consisting of the ÖVP and the far-right FPÖ. The two parties’ manifestos show how a common agenda could be forged, but also where key policy differences will present major challenges to forming a coalition. […] We would expect an economic agenda centred on lowering the tax burden on labour through a combination of income-tax cuts and insurance reductions. […] Immigration will be at the forefront of FPÖ policy […and] although the ÖVP’s immigration policy is not as radical, we expect immigration to fall. […] We expect policies regarding Europe and Ukraine to create division and slow policymaking.”