Macroeconomic Policy Making Lessons from AustroKeynesianism Franz Nauschnigg

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

Austro-Keynesianism • 1970 s/80 s: 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“ 3 ETUC 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 4 ETUC Conference: 1 -2 March 2005

Austro-Keynesianism and EU-membership • EU-Membership in 1995 - 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 5 ETUC 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 6 ETUC 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 Ø combination of fiscal consolidation and growth 7 ETUC Conference: 1 -2 March 2005

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GROSS DOMESTIC PRODUCT PER INHABITANT (in Purchasing Power Standards) EU-15= 100 9 ETUC 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). “ 10 ETUC Conference: 1 -2 March 2005

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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 13 ETUC 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 14 ETUC Conference: 1 -2 March 2005