EUROPEAN FISCAL: Austria Deficit Exceeds Maastricht Limit But Sanctions Unlikely

The 2024 Austrian budget deficit exceeded the Maastricht limit of 3%, totalling 4.7% of GDP (E22.5bln), a significant widening from 2.6% of GDP in 2023. Estimates for the 2025 deficit range from a 3.3% to 3.8% deficit-to-GDP, but the disappointing 2024 data is likely to have weakened the Austrian government's negotiating position regarding the scale of cuts required. A hefty fine from the EC is likely to be avoided despite the 2025 deficit being expected to exceed the 3% limit again as long as Austria continues to be seen to be negotiating in good faith.

• The 2024 deficit was above the Ministry of Finance forecast of 3.9% deficit-to-GDP and Austrian National Bank's updated forecast from December 2024 at 4.1%. Whilst the deficit has widened notably beyond the Maastricht limit, a key driver in the sharp increase in expenditure has been inflation adjustments and Austria intends to present a plan to narrow the deficit.
• The deterioration in the 2024 fiscal position was driven by an 8.8% increase in government expenditure compared to 2023, whilst revenues increased only 4.9% compared to 2023.
• The rise in expenditure was primarily due to public sector employee compensation, pension adjustments and the valorisation of social benefits as "a result of renewed inflation".
• Both public sector employee compensation and social benefits other than social transfers in kind rose more than 10% in 2024.
• Der Standard (in full here), reported last week that Finance Minister Marterbauer and Fiscal Council Chairman Badelt suggested widened 2025 saving requirements, with Badelt seeing E4-5bln in additional savings needs and Marterbauer even mentioning E6bln as an additional requirement. Either estimate is on top of the previously estimated E6.4bln savings planned.
• Note, defence spending which the government plans to raise to 2% of GDP by 2032 totalled only 0.7% of GDP in 2024. Looking ahead, significant concessions will have to be made to increase defence spending whilst containing the fiscal balance to negotiate an agreement to prevent any fines from the EC.
• We believe an agreement is likely to be reached with the EC given the Austrian government seeks to present a credible plan to narrow the deficit and the EC has historically reached agreements with countries rather than implement sanctions. In the case sanctions were to be implemented we expect this to be a surprise for markets and market-moving.