Austria has a well-developed market economy and a federal republic form of government; the state has historically played a large role in the economy, though that role decreased dramatically at the end of the 20th century. Governed by 2 major parties, the Social Democrats (SPO) and the conservative People's Party (OVP), Austria has enjoyed political stability and economic growth since 1945. The SPO, which garnered 33 percent of the votes in the 1999 national legislative elections, traditionally draws its constituency and much of its strength from the urban and industrial areas. In the past, the SPO has advocated heavy state involvement in strategic industries, the extension of social security benefits, and a full-employment policy. In the mid-1980s, the party shifted more toward the advocacy of free market economics and the balancing of the federal budget. The OVP's traditional constituency has been among farmers, large and small businesses, and lay Catholic groups. Its center of strength is rural Austria. The OVP has also advocated conservative financial policies and privatization of previously nationalized industries. The OVP received 27 percent of the votes in the 1999 election.
The major opposition to both parties during the late 1990s and early 2000s elections was the populist right-of-center Freedom Movement Party, headed by the controversial Jörg Haider, characterized as an ultranationalist (one who supports the nation at any cost), and a xenophobe (one who fears foreigners). Haider made several strong remarks praising Nazi policies. The rise of the Freedom Movement Party—from 5 percent of the votes in the 1983 election to 27 percent in 1999—was credited to voters who were disappointed by the employment opportunities in Austria. A system known as Proporz, supported by the ruling parties, distributed most top jobs in state business and public service to members of those parties. After the fall of the Iron Curtain in November 1989, when the U.S.S.R. started to loosen its control on the borders of its Eastern satellites, cheap and skilled labor came into Austria from Poland, Czechoslovakia, Hungary, and Slovenia. Many Austrian workers lost their jobs to the immigrants who were willing to work for lower pay and fewer benefits. In addition, many farmers were dissatisfied over the EU agrarian policy put into place after 1995, which lowered prices for agricultural products. In addition, the lack of professional chances in the civil service and in many other state institutions due to the EU budget criteria aroused the dissatisfaction of many young people who were seeking traditionally secure government jobs. Haider's Freedom Movement Party, which was against immigration and interference from the European Union, won increasing support.
In February 2000 the conservative People's Party, which wanted to establish an effective and legitimate government that would enjoy the support of Parliament, formed a coalition with the Freedom Party. Nearly 54 percent of the electorate voted for the new federal government. The European Union condemned Austria's new coalition, froze diplomatic contacts, and imposed sanctions , accusing Haider of being a racist, xenophobe, and Nazi sympathizer. Austria criticized the European Union for interfering in a democratically elected government. Demonstrations in Austria and throughout Europe followed. Haider did not join the government, and in February 2000 he resigned from the Freedom Movement Party to concentrate on his role as governor of the Carinthia province. In September 2000, the European Union lifted sanctions against Austria. Haider was expected to wield influence from the sidelines, however.
Austria's federal structure of government involves a high degree of decentralization with the executive and legislative functions shared between the Federation (federal government) and the Länder (provinces). The Länder play a significant role in federal legislation, having independent regional legislations which cooperate with the Federation in the execution of the federal legislation. According to the constitution of 1920, the head of the country is the president, who is elected by popular vote every 6 years and who represents Austria in its international relations and serves as commander-in-chief of the armed forces. Thomas Klestil, who was elected on 8 July 1992, was elected to a second term on 19 April 1998, with 63 percent of votes. The president is limited to 2 consecutive terms or a total of 12 years in office. Presidential elections are scheduled for the spring of 2004. The president appoints the head of the government, a federal chancellor, who appoints others to the executive branch. With the chancellor's recommendation, the president appoints the ministers. The president also appoints judges. After 4 February 2000, chancellor Wolfgang Schuessel of the OVP headed Austria's government.
The constitution of Austria provides for a distinct division of power among the executive, the legislative, and the judicial branches of government. Executive authority is vested in the federal government composed of the federal chancellor, a vice-chancellor, and other ministers. Legislative authority is vested in the bicameral (2-chambered) Federal Assembly composed of the Nationalrat (National Council or lower chamber) and the Bundesrat (Federal Council or upper chamber). Legislative authority is concentrated in the 183 members of the Nationalrat who are elected by direct popular vote for 4-year terms according to proportional representation . The Bundesrat consists of 64 members elected by the legislatures of the 9 provinces for 4-or 6-year terms, also according to proportional representation, with each province guaranteed at least 3 representatives. The Bundesrat reviews legislation passed by the Nationalrat and can send legislation back for reconsideration, but the Nationalrat need only pass the legislation a second time to override a veto. Furthermore, the Bundesrat can only initiate legislation by way of the government. The 2 chambers meeting as the Federal Assembly can propose a national referendum, if needed. The highest courts of Austria's independent judiciary are the Constitutional Court, which has jurisdiction over constitutional matters; the Administrative Court, which handles bureaucratic disputes; and the Supreme Court, which deals with civil and criminal cases. All cases initiated in the Administrative and Supreme Courts can be appealed to the Constitutional Court. The president appoints justices of all 3 courts for specific terms.
The federal government is responsible for developing and implementing the domestic and foreign policies of Austria and sets economic policy in consultation with what is known as the social partnership, consisting of the representative bodies of businesses, farmers, and labor. Designed to minimize social unrest, this consensual approach has come under criticism for slowing the pace of economic reforms, particularly in inflexible labor and product markets. With an increasing number of decisions being made at the EU level, the influence of the social partnership has declined significantly. The government no longer has majority ownership in companies such as OMV (oil and gas), Voest (steel and plant engineering) and Elin (electrical machinery and equipment). Subsidy programs have also been scaled back to conform to EU regulations.
In 1997, the government completed an ambitious 10-year privatization program, which included the privatization of steel, aluminum, petroleum, engineering, banking, and other entities. The sale of the Postal Savings Bank and the Austrian Tobacco Company were underway in 2001. Furthermore, the federal railroads were excluded from federal budget accounts, and the newly reorganized Post und Telekom Austria (PTA) (postal and communications company) was divested as a private corporation and was required by law to list its shares on the stock market. Another focus of economic policy was employment creation. Austria has been one of the foremost supporters of the EU's national employment plans, which place strong emphasis on training and education, removal of bureaucratic hurdles, more labor flexibility, and a favorable climate for business start-ups. While some of these plans have been implemented, the government has failed to completely do away with the governing parties' special relationships with business and labor representatives.
The major source of government revenue comes from taxes. The corporate income and capital gains tax rate is 34 percent. A withholding tax of 25 percent applies to dividends, except for those paid to Austrian companies, and interest. A 20 percent tax rate applies to royalties. Only the Austrian-source income of non-resident companies is subject to taxation. When Austria joined the European Union, the government was forced to accelerate structural reforms and to liberalize its economy. Most non- tariff barriers to merchandise trade were removed, and cross-border capital movements were fully liberalized.
The 1996-97 economic program enabled the government to cut the federal deficit to 3.7 percent of gross domestic product in 1996, and to 2.6 percent in 1997. Because of this program, which included tax increases, the share of total taxes in gross domestic product reached a high of 44.8 percent in 1997. In 2000 the government cut taxes. The tax reform was expected to reduce the burden on taxpayers by approximately US$2.2 billion by 2003. These reforms included greater tax privileges for old age, a decrease in marginal tax rates, and an increase in the standard tax credit from US$592 to US$817 per year. These measures will ease the burden on the taxpayer by between US$268 and US$469 a year. About two-thirds of the entire reduction of the tax burden will benefit people earning monthly incomes of less than ATS, 000 (US$1,540). Through these measures, the tax burden on the majority of incomes is expected to be lowered in real terms.
Regarding the taxation of enterprises, the 2000 tax reform package contained 2 new provisions: Interest payments on personal equity will be taken into consideration for taxation purposes, and a tax allowance of US$335,000 will be introduced for inheritance (gift) tax in the case of enterprise transfers. Moreover, the research contribution and apprenticeship allowance will be increased. Private provision for old age will be promoted. In addition, regarding the taxation of capital gains from the disposal of securities, the retention period will be prolonged from 1 year to 2 years.
Relative to the gross domestic product, this tax reform is more comprehensive than the previous ones implemented in 1989 and 1994. The main emphasis of the reform is on easing the tax burden on private consumption. Consumer demand is expected to continue to increase by a cumulative 1.8 percent per year in real terms by 2005. Since direct incentives for investors are extremely modest, investments are not expected to grow significantly. Higher domestic demand, which also results in higher imports, is expected to only modestly contribute to the growth of GDP by 2005. The labor market is thought to be able to absorb another 9,300 employees. Price increases are expected to be insignificant at 0.2 percent.