Austria says Ukraine war is swelling deficit back to EU’s 3% limit

VIENNA (Reuters) – The Ukraine war’s negative impact on economic growth and associated costs such as reducing dependence on Russian natural gas have forced Austria to increase its budget deficit and debt forecasts for this year, the Finance Ministry said on Wednesday.

Austria, as did many of its peers, spent lavishly on measures to cushion the blow of the coronavirus pandemic and had expected a stronger economic recovery this year to help it bring its budget deficit back within the European Union’s limit of 3% of gross domestic product (GDP) for the first time since 2019.

Economic researcher WIFO, which provides the forecasts on which the government bases its budget, last month cut its GDP growth outlook for this year to 3.9%, almost a percentage point less than the 4.8% it expected when the 2022 budget was announced last October.

“The war’s economic effects and the resulting economic relief and support measures as well as strategic investments make it necessary to amend the Federal Finance Act 2022,” the Finance Ministry said in a statement, referring to the national budget law.

The ministry now expects a budget deficit of around 3% of GDP, up from the 2.3% announced in October, while the debt-to-GDP ratio will be around 80% of GDP rather than the originally forecast 79.1%, it said.

Austria obtains roughly 80% of its natural gas from Russia, a level it says cannot immediately be ended.

The ministry said Austria was budgeting 1.6 billion euros ($1.7 billion) this year for a “strategic gas reserve”. Providing for the tens of thousands of Ukrainian refugees who have arrived in Austria will cost hundreds of millions of euros this year, it said.

The ministry also cited increased costs from new assistance measures aimed at reducing rising energy bills and a smaller tax take due to items like a reduced electricity tax.

($1 = 0.9271 euros)

(Reporting by Alexandra Schwarz-Goerlich and Francois Murphy; editing by Grant McCool)