Austria: New Government Coalition Faces Pressure to Consolidate its Public Finances

Today, the new government of Austria, rated AAA, Stable trend, led by Christian Stocker of the centre-right Österreichische Volkspartei (ÖVP) was sworn into office after last week's unveiling of a new three-party government coalition together with the centre-left Social Democratic Party of Austria (SPÖ) and the liberal party NEOS. The formation of a new government coalition took five months and, hence, longer than any previous government formation, as policy differences across parties impeded coalition negotiations. Talks between the three parties had initially collapsed in early January and only resumed in mid-February after an attempt to form a two-party coalition between the right-wing Freedom Party (FPÖ), the largest party in parliament, and the ÖVP had failed. In terms of fiscal policy, the new government coalition plans to shrink the large fiscal deficit through fiscal consolidation measures particularly on the spending side. While the announced scale of fiscal consolidation - if fully implemented - would narrow the fiscal deficit markedly, fleshing out detailed fiscal policy measures and a weaker-than-currently expected economic environment might test the resolve of coalition partners to follow through.

Key Highlights
-- Agreement to form centrist three-party coalition government coalition ensures broad policy continuity.
-- Planned budgetary consolidation measures will reduce fiscal deficits significantly but are likely to weigh on economic growth.
-- The political stability of the new government will be tested by the required consolidation efforts.

"The announced fiscal consolidation measures - if fully implemented - would help to narrow budgetary pressures markedly," said Max Dietz, Assistant Vice President in the Global Sovereign Ratings Group. "Following through with implementing largely unpopular fiscal consolidation measures, however, will depend on preserving cohesion within the heterogenous three-party government coalition."