Implications of a persistent low growth path – A Scenario Analysis

The project “Implications of a persistent low growth path – A Scenario Analysis” deals with the question how the Austrian economy and society could cope with long-lasting low eco-nomic growth, measured in GDP.

The project started with a literature review about the reasons, consequences and measures for dealing with a persistent low growth. Following, a reference scenario with an average growth rate of the Austrian GDP of 2.0% per annum and a low-growth scenario with an aver-age growth rate of 0.55% per annum until 2025 were designed. The low-growth scenario was based on domestic and foreign low-growth causes. Foreign causes were a deteriorating balance of trade and increasing resource prices; domestic causes were consumer restraint of households and less immigration.

The results show that the macroeconomic consequences of low growth in Austria are high: the labour market suffers from a shortage of labour supply (due to reduced migration) and from a reduced demand for labour (due to reduced demand in consumption, investments and exports). The effects of less employment in the integration scenario lead to a negative development of the available income of private households (tax rates and social security contributions being constant). Compared to the reference scenario, public debt is higher. Due to an assumption of slight population growth, public expenditures grow slower but tax incomes decrease at a higher rate.

Nevertheless per capita GDP increases during the whole simulation period. Per capita con-sumption, however, increases only at the end of the simulation period because of the as-sumed population changes.

From an ecological perspective a persistent low-growth rate in Austria leads to a slower in-crease of resource consumption, but not to an absolute reduction. CO2-emissions also slightly increase in the scenarios. It can therefore not be assumed that low growth leads to achieving energy and environmental policy goals.

Based on the results of the low-growth scenario, a policy scenario analyzed whether and how policy measures are able to cope with the negative consequences of persistent low growth. Four measures that affect employment, consumption and government budget were chosen as these three areas can be influenced by domestic measures. The measures were designed not to create additional costs for national finances. Together with the clients and experts the following four measures were chosen:

• Reduction of working time by 10%; this measure was designed cost-neutral, i.e. wages increase by the degree of induced productivity effects.
• Introduction of a cost-neutral eco-social reform of levies; the petroleum tax was in-creased and social security contributions reduced; the reduction was equally shared between employees and employers.
• Reduction of environmentally harmful subsidies; about 1 billion annually until 2025.
• Promotion of the private demand for services; the demand for labour-intensive ser-vices of private consumption was assumed to increase at a standard rate of about 3% until 2025 while at the same time private households reduce their consumption ex-penditures for environmental harmful goods.

The modelling results show that these measures that do not aim to spur growth are suitable to reduce the negative economic effects of low growth. Implementing the working time re-duction and the eco-social reform of levies can improve the labour market situation. The negative effects on the national budget can be diminished by a reduction of environmentally harmful subsidies. Induced behaviour changes of private households can reduce energy and resource-intensive consumption.

It is essential not to analyse the aspired changes separately. Therefore all scenarios were modelled with the integrated environment-energy-economy model e3.at. Only an integrated view allows revealing mutual reinforcing but also compensating effects.