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Why Can't a Rich Country Balance Its Books?

October 8, 2026 • Merlin Duty-Knez

austriapublic-financeclimate-policytaxation

IntermediateHelpful to know: What "percent of GDP" means (a figure measured against everything the economy produces in a year)

Quick Read

Argument: Austria's deficit is not a temporary dip: pensions, interest and lost revenue have kept it above the EU limit since 2024. Taxing pollution and large inheritances would raise about 40% to just over 100% of what is needed to stay under the limit, the top only on generous assumptions, but not enough to stop debt from rising.
Why it matters: "Tax the bad things" is a popular answer to both the budget and the climate. Knowing how far it goes tells you which other, less popular reforms a serious plan still needs.
Takeaway: When a politician promises to fix the budget with one kind of tax, ask for the size of the gap in euros and the yield of the tax in euros. If the second number is smaller, ask what fills the rest.

Written by AI, overseen by a human

The question

Austria is rich. Its public finances are not. In 2025 the general government spent EUR 282.7 bn and took in EUR 261.3 bn, a deficit of 4.1% of GDP, with debt at 80.7% of GDP¹. The EU has the country in an excessive deficit procedure, its process for member states that break the deficit or debt rule (Austria’s is about the deficit)², and the two official forecasts for getting out of it disagree.

The intuitive fix has an appealing shape: tax the things that cause harm, stop subsidising fossil fuels, and tax large inheritances instead of work. The promise is that the same changes help both the budget and the climate. I wanted to know whether that adds up.

Taxing pollution and large inheritances helps a lot, but it isn’t enough. By my estimate, these tax increases and cuts to tax breaks would raise about 40% to just over 100% of the extra consolidation (spending cuts or tax increases) the Fiscal Council says Austria needs to stay below the 3% limit. The top of that range needs generous estimates and the government closing a EUR 0.4 bn gap in its own package. Even then, debt would keep rising, and the pressure from pensions and interest would still be there.

The full report, with every number, its source and the code behind each chart, is in the budget and climate report (PDF) (Quarto source with all data and chart code: report source (.zip)). Its figures go up to June 2026; this post uses Statistik Austria’s revision of 30 September for 2019–2025.

Wealth is not the same as a balanced budget

A country’s GDP tells you how much its economy produces in a year. The deficit tells you whether the state (all levels together: federal government, Länder, municipalities and social security) spends more than it raises. Austria raises a lot, about 50% of GDP in 2025, but spends more, about 55%¹.

Axes: each bar is one year’s actual budget balance in percent of GDP; below zero is a deficit. The two lines are forecasts for 2026–2030, both starting from the 2025 actual; the dotted line is the EU’s 3% limit. Actuals are Statistik Austria’s figures as revised on 30 September 2026; both forecasts date from June, before that revision. Look for: the green line rising to the dotted limit in 2028 and staying at or above it, while the orange line stays below it, meaning deficits above 3%. Takeaway: after shrinking below the limit in 2023, the deficit rose above 3% again in 2024 and stayed there in 2025; whether it gets back under depends on which forecast you believe³^,⁴.

The two forecasts already differ in 2026 and drift further apart after that. The Finance Ministry plans to get the deficit below 3% in 2028 (its chart shows 3.0%, rounded)³. The independent Fiscal Council expects 3.8%, and debt rising to 87.8% of GDP by 2030⁴. Both start from the same WIFO economic forecast. The Fiscal Council mainly expects worse numbers at the federal level, from higher EU contributions and less from the consolidation package, plus slightly higher deficits in social security⁴.

Part of the Fiscal Council’s 2028 figure is a one-off. When the national CO2 price gives way to ETS2, the EU carbon market for heating and fuels, about EUR 1.6 bn of revenue is booked a year later under EU accounting rules⁴. Without that effect, its 2028 forecast would be about 3.5%: still above the limit.

Why doesn’t the deficit disappear when the economy recovers?

Because most of its drivers are long-lasting:

Pensions. Austria has two public pension systems: the statutory one for most employees, which the federal budget tops up, and the older system for civil servants, which is being phased out. Federal transfers to the statutory system went from 2.45% of GDP in 2018 to 3.45% in 2024, and the Pension Commission projects 4.23% for 2030⁵. The Chamber of Labour counters that in the EU’s 2024 Ageing Report, total public pension spending barely moves as a share of GDP until 2070, because civil-servant pensions shrink as the statutory system grows⁶. Both can be true: the federal top-up rises steeply until 2030 even if total pension spending is stable in the long run.
Less revenue from inflation. Since 2023, tax brackets move up automatically by two-thirds of inflation, so rising prices push people into higher brackets much less than before. That was arguably fair, but the then Finance Minister expected it to cost about EUR 3.5 bn in 2024 alone, a figure his ministry later put at EUR 3.65 bn⁷. (The last third is decided each year; the government has suspended it until 2029 to save money⁴.)
Interest. Interest payments nearly doubled, from EUR 4.3 bn in 2022 to EUR 8.3 bn in 2025¹.
Federalism. Together, the Länder and municipalities, Vienna included, ran a deficit of about EUR 5.6 bn in 2025¹, spending money that is mostly collected by the federal level and shared out to them⁸.

The Fiscal Council adds health, long-term care and defence to the list of costs that are rising regardless of the economy⁴.

The green lever is barely being pulled

WIFO estimates Austria’s climate-harmful subsidies at EUR 4.1–5.7 bn a year: the lower tax on diesel, the commuter allowance, tax breaks for company cars and energy tax exemptions for producers⁹. Yet in the government’s 2028 consolidation package, the mix of savings and tax increases meant to close the deficit, the Finance Ministry files just 4% of the measures under cutting these subsidies³. The Fiscal Council left even those out of its forecast, because they weren’t specified in enough detail⁴.

Axes: each bar is one group’s share of the consolidation measures planned for 2028 in the 2027/28 double budget, as presented by the Finance Ministry. Look for: the orange bar at the bottom. Takeaway: the biggest contributions come from companies and banks, for example a higher corporate tax on profits above EUR 1 m; climate-harmful subsidies are the smallest item³.

Meanwhile the national CO2 price is frozen at EUR 55 per tonne until the EU’s own carbon market for heating and transport (ETS2) takes over in 2028, after the EU delayed it by a year¹⁰. In 2025 the national price raised EUR 1.42 bn¹¹. Since the Klimabonus, the annual payment that returned this money to households, was scrapped, the revenue stays in the budget¹².

Climate policy is also budget policy

Austria’s emissions outside the EU trading system must fall 48% below 2005 levels by 2030¹³. Projections still show a shortfall¹⁴. Whatever Austria doesn’t cut at home, it may have to cover by buying allowances from other member states; in April 2021 the Court of Audit put the possible bill for 2021–2030 at up to EUR 9.2 bn, assuming no new measures and under the older, weaker target¹⁵.

Axes: each bar is a total of emissions from transport, buildings, agriculture and other sources outside the EU trading system, in million tonnes of CO2 equivalent. The two orange bars are projections made for the Finance Ministry in December 2025. The baseline counts measures decided by May 2025. The activity scenario adds measures from the government programme, including cuts to climate-harmful subsidies, and some further measures for 2030 agreed with the ministry. The green bar is the EU target path for 2030 from the same report. The 2005 value is the Environment Agency’s figure as reported by ORF in 2023¹⁶; the 2024 value comes from the 2026 inventory. Look for: the gap between the orange bars and the green one. Takeaway: Austria misses its 2030 target by 9.1 Mt on current policies and still by 6.9 Mt in the activity scenario¹⁴. (The bar values are rounded; the gaps are the report’s own.)

A minimal model: how far do the levers go?

To test the fix-both-at-once intuition, I put rough numbers on five levers for 2028:

Abolish the diesel tax privilege: EUR 0.5–1.1 bn (low end Momentum Institut’s revenue estimate, high end WIFO’s estimate of the tax break’s static cost, which overstates the revenue)¹⁷^,⁹.
Cut the commuter allowance by 30–60%: EUR 0.15–0.3 bn.
Cut the flat-rate taxation of company cars and their parking spaces by 30–60%: EUR 0.15–0.3 bn.
Raise the CO2 price by EUR 20–45 per tonne, assume demand falls 10%, and return half the extra revenue to low-income and rural households: EUR 0.16–0.45 bn net.
Introduce an inheritance tax with a EUR 1 m allowance: EUR 0.5–1.8 bn (low end the Social Democrats’ (SPÖ) own estimate, high end a study by the Chamber of Labour and an EU Joint Research Centre economist, for 2025 in 2022 prices; I use both unchanged for 2028, without adjusting for inflation)¹⁸^,¹⁹.

The Fiscal Council estimates that to stay below 3% for good, Austria needs about EUR 3.7 bn a year of extra consolidation on top of the 2027/28 budget, after setting aside the EUR 1.6 bn one-off, and assuming the government also closes a EUR 0.4 bn “implementation gap” it found in the 2027/28 package⁴. (Getting below 3% in 2028 itself, one-off included, would take EUR 5.7 bn; that figure also counts how savings slow the economy.)

Axes: each blue bar spans the low and high estimate of what one lever would raise per year in 2028, after the assumptions above. The green bar is all five together; the orange bar is the extra consolidation the Fiscal Council says Austria needs to stay below 3%. Look for: where the green bar ends compared with the orange one. Takeaway: the five together reach the orange bar only at the top of their ranges.

All five together raise roughly EUR 1.5–4.0 bn a year, about 40% to just over 100% of the EUR 3.7 bn needed to meet the 3% rule. Covering it needs the estimates to land near the top of their ranges, including a diesel figure that overstates the revenue. If the EUR 0.4 bn implementation gap stays open, the need is about EUR 4.1 bn and even the top falls short. If the Ministry’s optimistic path holds, there is no gap, and the same money could fund a cut in taxes on work instead: the tax wedge on a single worker on the average wage is 47.1% of labour costs in Austria, against an OECD average of 35.1%²⁰.

And getting just below 3% doesn’t stop debt from growing. The Fiscal Council estimates that keeping the debt ratio stable requires an average deficit of about 2.5% of GDP over 2026–2030, and once Austria leaves the procedure, EU rules require debt to fall, which means deficits of no more than about 2% on average⁴. No current forecast gets there. Green and wealth taxes improve the tax mix and narrow the gap, yet on their own they leave debt rising. The model also only tests the budget side: even the activity scenario, which includes cuts to climate-harmful subsidies, still misses the 2030 emissions target by 6.9 Mt¹⁴.

What the model leaves out

The model has five limits:

The inputs are uncertain. The WIFO subsidy study uses 2016–2020 data, the inheritance-tax estimates differ by a factor of more than three, and the CO2 base is an approximation from cash receipts. Where an inheritance tax lands in its range depends on design, above all on how gifts made during life and private foundations are treated; the report discusses this. The estimates I use don’t show how relief for family businesses or the cost of collection would change the yield; generous business relief would push it towards the low end.
It is one year, not a path. The yields are for 2028, while the consolidation need recurs every year. As emissions fall, the CO2 base shrinks with them, so a carbon-price yield is not a lasting one.
The legal question is open. From 2028 Austria may not be able to add its own CO2 price on top of the EU market without further legal steps.
The politics are not in the model. Fuel and heating taxes can weigh more on lower-income and rural households relative to their income, so the model returns half of the extra CO2 revenue to them. How well that works depends on the design: WIFO and IHS criticised the Klimabonus as poorly targeted²¹.
The opposing case is serious. A uniform rise in the retirement age weighs most on people of lower socioeconomic status, who on average live shorter lives, as research on Denmark and Sweden shows²². On the other side, Austria’s taxes and social contributions were 43.8% of GDP in 2024, the fourth-highest share in the EU²³, which is a strong argument for cutting spending rather than reshuffling taxes.

What else a plan would need

Something more durable has to fill the rest of the gap, from taxes or spending. Four less popular changes are candidates; this post does not show that they are the only ones or estimate what they would save:

A credible, legislated carbon price path that people can plan around. Austria’s own record, a price freeze, a scrapped Klimabonus and a delayed ETS2, shows how quickly the path can change.
Rules for landlords and money for the grid, so households can respond to the price. A tenant who pays the heating bill can’t replace the landlord’s gas boiler. Consolidation that cuts this kind of investment to meet the rule would work against the climate side of the plan.
Pension reform, for example a retirement age linked to life expectancy, with rules for physically demanding jobs. Denmark has linked the two since 2006 and has legislated an increase to 70 by 2040²⁴.
A federal system in which the governments that spend money also carry responsibility for raising it, together with an equalisation system that keeps services funded in regions with less revenue of their own.

Other durable tax or spending choices could do the same job; the numbers here only show that the five levers alone don’t.

Statistik Austria, figures as revised on 30 September 2026: Einnahmen und Ausgaben des Staates (statistik.at), Government deficit by subsectors and Länder and deficit series since 1995 (statistik.at), debt ratio end-2025 in the press release of 30 September 2026 (PDF). Interest payments from the release of 31 March 2026 (PDF). Revenue and spending shares of GDP calculated with 2025 GDP of EUR 518.2 bn. ↩ ↩² ↩³ ↩⁴
Council of the EU (10 July 2026). Recommendation on Austria, stating that the procedure is held in abeyance: EUR-Lex PDF. Overview: European Commission, Excessive deficit procedure: Austria, economy-finance.ec.europa.eu ↩
Federal Ministry of Finance (9 June 2026). Presentation Doppelbudget 2027/2028. PDF. Plan values and the composition of measures read from chart labels. ↩ ↩² ↩³ ↩⁴ ↩⁵
Fiskalrat (June 2026). Main results of the 2025 to 2030 fiscal rules compliance report: forecast path, the EUR 1.6 bn ETS2 one-off, the EUR 3.7 bn and EUR 5.7 bn consolidation needs, the 2.5% debt-stabilising deficit and the suspended last third of bracket indexation. PDF. Forecast values read from chart labels. ↩ ↩² ↩³ ↩⁴ ↩⁵ ↩⁶ ↩⁷ ↩⁸ ↩⁹
ORF (2025). Pensionen: Ausgaben steigen bis 2030 auf 4,23 Prozent des BIP, on the Pension Commission’s medium-term report. orf.at/stories/3412902 ↩
Arbeiterkammer Wien (January 2026). Öffentliche Pensionen: Nachhaltig sicher, citing the EU Ageing Report 2024 (13.8% of GDP in 2013, 14.0% in 2070). wien.arbeiterkammer.at ↩
Der Standard / APA (9 July 2023). Ende der kalten Progression kostet 2024 3,5 Milliarden Euro. derstandard.at. Updated figure: Federal Ministry of Finance press release, 23 December 2023, Brunner: Abschaffung der kalten Progression bringt … 2024 rund 3,65 Mrd. Euro Ersparnis. ots.at ↩
Federal Ministry of Finance. Besteuerungsrechte und Abgabenerträge (taxing rights and shared tax revenue). bmf.gv.at ↩
WIFO (2022). Analyse klimakontraproduktiver Subventionen in Österreich (2016–2020 data). PDF. Its commuter item combines the commuter allowance with the Pendlereuro; its company-car item includes parking spaces. ↩ ↩²
Federal Ministry of Finance. NEHG 2022: Entwicklung und Handelsphasen. bmf.gv.at ↩
Federal Ministry of Finance. Budget execution December 2025, UG 16 (public levies): national emissions trading EUR 1,416.6 m. service.bmf.gv.at ↩
Federal Ministry of Finance (2025). Budget 2025/2026, consolidation measures: abolition of the climate bonus, about EUR 2.0 bn a year. PDF ↩
Federal Ministry of Agriculture, Climate and Environment (2026). Treibhausgas-Inventur 2024. bmluk.gv.at. The 2024 value is derived from its statement that the 43 Mt annual limit was undercut by about 0.3 Mt. ↩
Umweltbundesamt (12 December 2025). Treibhausgas-Szenarien für die langfristige Budgetprognose 2025, REP-1010, study for the Finance Ministry, figure 1. PDF. The target is missed in both scenarios even with the EU’s flexibility for ETS allowances. ↩ ↩² ↩³
Rechnungshof (16 April 2021). Klimaschutz wird in Österreich nicht zentral koordiniert: compensation payments of up to EUR 9.214 bn. rechnungshof.gv.at ↩
ORF (2023). Österreich verfehlt Klimaziele klar, reporting 56.2 Mt for 2005. orf.at/stories/3313836 ↩
Momentum Institut (November 2025). Policy Brief 11/2025 Budgetwirksamer Klimaschutz. PDF ↩
ORF (2023). SPÖ-Vorstand: Konzepte für Vermögenssteuern fixiert: the inheritance tax is expected to raise EUR 500–800 m a year. orf.at/stories/3330187 ↩
Grünberger, K., Derndorfer, J. & Schnetzer, M. (2024). Erbschaften in Österreich: eine Modellschätzung intergenerationeller Vermögenstransfers bis 2050. Wirtschaft und Gesellschaft 50(1): 21–41: EUR 0.9–1.8 bn a year including avoidance; 0.2% of heirs affected at a EUR 1 m allowance, for 2025 in 2022 prices. PDF ↩
OECD (2026). Taxing Wages 2026, single worker without children at the average wage, 2025. PDF ↩
ORF (November 2024). Grüne pochen auf Beibehaltung des Klimabonus. orf.at/stories/3375384 ↩
Strozza, C., Bergeron-Boucher, M.-P., Callaway, J. & Drefahl, S. (2024). Forecasting Inequalities in Survival to Retirement Age by Socioeconomic Status in Denmark and Sweden. European Journal of Population. doi:10.1007/s10680-024-09704-8 ↩
Eurostat. Tax revenue statistics, Statistics Explained (data extracted 31 October 2025). PDF ↩
The Local Denmark / AFP (24 May 2025). Inside Denmark: The highest retirement age in Europe: parliament adopted a law raising the retirement age from 67 to 70 by 2040. thelocal.dk ↩

Glossary

General government: All levels of the state together: the federal government, the nine Länder, the municipalities and the social security funds. EU deficit and debt rules apply to this total.
Deficit: How much more the state spends than it takes in during one year. Debt is what the state still owes from its borrowing; deficits usually add to it.
3% limit: The EU rule (from the Maastricht Treaty) that a member state's deficit should stay below 3% of GDP, and its debt below 60%.
Excessive deficit procedure: The EU process for a country that breaks the 3% limit: it must present a plan to get back under it, and its progress is monitored until it does. Austria's procedure is currently 'held in abeyance': in July 2026 the EU found it is taking effective action, so the procedure stays open without further steps for now.
Fiscal Council: Austria's independent budget watchdog (Fiskalrat). It forecasts the public finances and checks whether the government is keeping to the fiscal rules.
WIFO: The Austrian Institute of Economic Research, the country's largest economic research institute. Its forecasts are used in the federal budget.
Bracket creep: When wages rise with inflation, people slide into higher tax brackets and pay a larger share in tax although they aren't richer ('kalte Progression'). Since 2023 Austria moves its brackets up automatically by two-thirds of inflation; the last third is decided each year.
Länder: Austria's nine federal states, such as Vienna, Tyrol or Styria. They spend a lot of money but raise little of it themselves.
Climate-harmful subsidies: Tax breaks and payments that make fossil fuel use cheaper, such as a lower tax on diesel than on petrol or tax relief for long car commutes.
Non-ETS emissions: Greenhouse gases from sources outside the EU emissions trading system, mainly transport, buildings and agriculture. Each member state has its own binding 2030 target for them.
Consolidation: Budget jargon for closing a deficit: spending cuts and tax increases, counted against what the deficit would have been without them.
ETS2: The EU's second emissions trading system, a carbon market for heating and road fuels. It starts in 2028 and replaces Austria's national CO2 price.
Tax wedge: The gap between what a job costs the employer and what the employee takes home, as a share of the labour cost: income tax plus employee and employer social contributions.
Percentage point: The difference between two percentages. A deficit going from 3.8% to 3.0% falls by 0.8 percentage points.