Austerity policy is making a comeback in Europe. The crises of recent years have placed many European countries under considerable financial pressure. With the reintroduction of EU fiscal rules, governments aim to regain control over public finances and address mounting debt problems. Particularly in the tension between transformation and social security, budget policy determines whether climate investments and essential public services can remain sustainable.

Currently, nine EU countries are subject to the Excessive Deficit Procedure. Alongside major economies such as France and Italy, Austria has also joined the list of countries of concern. Without budgetary measures, Austria’s deficit would remain permanently above 5% of GDP. As a result, calls for spending cuts have grown louder. Less obvious, however, is how public finances can be successfully consolidated in the current difficult economic environment.

The Keynesian critique of austerity is well supported by empirical evidence: when governments, households, and businesses all attempt to save simultaneously, economic growth stagnates. After nearly three years of recession and stagnation, Austria is now expected to see only modest growth. At the same time, unemployment remains high.

Yet the narrative of budget consolidation remains largely uncontested in Austria. Even progressive actors often elevate it to an overriding policy objective. By contrast, proposals to reduce rising unemployment or expand the overstretched health and care systems are barely audible. Budget consolidation would be far more promising if it took place in a context of employment growth. This raises a fundamental question: would it not be economically more sensible to first overcome the inflation and economic crisis, and only afterwards consolidate the budget?

Unequal burdens: Who pays for consolidation?

Budget consolidation has not only economic but also distributional consequences. When governments cut spending, low-income households are typically affected disproportionately. People in precarious employment, with low wages and limited savings, depend more heavily on welfare-state services. When these services are reduced, the consequences are immediately felt.

The gap between rich and poor — already widened by the crises of recent years — is likely to expand further as a result of austerity policies.

This effect can already be observed in the first budget of Austria’s new federal government, which is guided by the objective of consolidation. Although the cuts to social benefits are relatively modest and compensatory measures have been introduced to mitigate negative effects, the overall distributional impact on household incomes is negative.

Because the largest fiscal measures affect the population broadly, the absolute income losses appear roughly similar across income groups. However, relative losses differ significantly. While the top income decile loses about 0.9% of its income, the lowest decile loses more than three times as much — around 2.8%.

Social and ecological consequences of austerity

Austerity policies have not only social but also ecological implications. Spending cuts frequently affect public services that are central to gender equality and to a successful ecological transformation.

On the one hand, this concerns affordable childcare, care services, health care, and social infrastructure. When these services are reduced, the burden of unpaid care work increases, while opportunities for paid employment, training, and social participation — particularly for women — decline.

On the other hand, austerity often affects investments in climate-friendly and resilient infrastructure. Public transport expansion, energy-efficient building renovation, and climate adaptation measures are typical examples. Yet these investments would reduce long-term costs and strengthen the resilience of essential services.

A paradox emerges: short-term budget relief is purchased at the cost of long-term social and ecological expenses.

The local level: Financial erosion of municipalities

Budget cuts at the municipal level are especially visible to citizens because municipalities play a crucial role in providing essential public services. They are responsible for maintaining transport infrastructure, implementing climate investments, operating recreational and sports facilities, and providing childcare and primary education.

In Austria, almost half of the country’s roughly 2,000 municipalities are now so-called deficit municipalities. This means their ongoing expenditures can no longer be covered by their regular revenues.

The reasons are diverse and partly structural. Significant tax cuts at the federal level have slowed the growth of revenues for subnational governments. In addition, newly introduced taxes — such as the CO₂ tax — have been defined as exclusively federal taxes. This means the revenue remains entirely within the federal budget rather than being shared with states and municipalities through existing distribution formulas.

The recession of recent years has further weakened local revenue bases.

On the expenditure side, inflation-driven increases in personnel and operating costs, as well as rising municipal contributions to state-level responsibilities such as health and social services, have played a major role. As a result, municipalities retain fewer financial resources. Whereas municipalities were able to keep almost 50% of their allocated shared tax revenues in 2019, this share is expected to fall to around 40% by 2029.

Budget consolidation overburdens municipalities

A structurally weakened revenue base, combined with rising expenditures driven by inflation and demographic change, leads to increasingly tight municipal budgets. The problem is compounded by the fact that municipalities have little ability to compensate through their own revenues.

In Austria, the taxation authority is highly centralised and largely rests with the federal government. Municipal fiscal autonomy is therefore limited. Even for taxes that flow directly to municipalities — such as the municipal payroll tax or property tax — regulatory authority typically lies at the federal level.

Municipal consolidation, therefore, risks occurring primarily through postponed investments and reductions in services.

Municipalities account for around one-third of total public investment. Such investments generate a double return: they stimulate short-term growth and employment while also increasing the long-term productive capacity of the economy. Especially during the current recession, the multiplier effects of public investment would likely be particularly strong.

Service cuts may include reduced opening hours in municipal offices or kindergartens, lower funding for community organisations and cultural centres, reductions in social housing or public transport, and even the closure of swimming pools, libraries, or sports facilities.

The consequences affect all residents, though unequally. Homeowners and those able to afford private services are less affected. By contrast, low-income households that depend on public housing, childcare, or other municipal services bear the greatest burden.

Greater fairness through stronger revenues

Since budget consolidation is unlikely to be postponed, the challenge is to design it more intelligently. Greater emphasis should therefore be placed on the revenue side.

Revenue-based consolidation tends to harm economic activity and employment far less than spending cuts. It is also more equitable from a distributional perspective. Currently, only around one-third of consolidation measures rely on increased revenues.

Budget consolidation should also be used as an opportunity to correct imbalances in the tax system and reduce social inequality. At present, around 80% of tax revenues come from labour and consumption, while less than 2% come from wealth.

While recent budgets introduced some positive changes in the taxation of foundations, additional increases in wealth-related taxation are needed. International institutions such as the OECD and the European Commission have long recommended that Austria reintroduce an inheritance tax. Such a tax could become a central pillar of budget consolidation.

In addition, municipal revenues should be strengthened. Increasing the property tax, which flows directly to municipalities and has not been raised for decades, is a widely supported proposal.

Conclusion

Austria’s current budget consolidation is taking place at an unfavourable moment. High inflation and rising unemployment already place significant pressure on households, and austerity measures further increase inequality.

The effects are particularly visible at the municipal level. Cuts to kindergartens, swimming pools, and cultural facilities threaten public spaces and social infrastructure. The consequences of postponed investments — for example, in transport or housing infrastructure — will only become visible with a delay in the coming years.

Excessive spending cuts could also weaken the already fragile economic recovery and thereby increase the need for future consolidation.

For these reasons, budget consolidation should place greater emphasis on revenue measures, particularly contributions from individuals with very large wealth holdings. From a distributional perspective, spreading the burden more broadly would also be fairer. At the very least, the scale of consolidation should not overwhelm municipalities or force them to reduce essential public services.

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Editorial Note:

This article is produced as part of a collaboration between Rethinking Economics International, Makronom and the Economists for Future DE and was originally written in German language. The 2026 contributions engage with ongoing debates on anti-authoritarian and anti-fascist perspectives on economic policy, with particular attention to how social security arrangements can help counter authoritarian and nationalist tendencies. Contributions in this series also explore welfare state design, property relations, pension systems, and institutional reforms with a view to strengthening democratic cohesion, ecological stability, and economic resilience. The views expressed in this article are the author’s own and do not necessarily reflect those of the participating platforms.

About the authors:

Tamara Premrov is a policy advisor on distributional issues and feminist economics in the Department of Economics and Statistics at the Vienna Chamber of Labour (AK Wien).

Maximilian Mayerhofer is an economist based in Vienna.

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