Will inflation force tax changes in Austria from 2023?

There is a possibility that Austria’s so-called cold progression - which means tax brackets are not adjusted for inflation - could be abolished by next year.

A customer with a €5 note. Products are getting pricier in Germany.
Inflation hit 8 percent in May - the highest rate in Austria since 1975. Photo: picture alliance/dpa | Moritz Frankenberg

Austria’s Finance Minister Magnus Brunner has told journalists that an abolition of the cold progression tax system could be a possibility as soon as 2023, and that a working group has been set up to look into it.

This is a surprise development for many as Brunner has previously stated his opposition to the plan, which was already part of the government’s programme.

A report by Die Presse says Brunner has previously voiced concerns that getting rid of cold progression would primarily benefit higher earners.

The reason why Brunner is now considering an end to cold progression is reportedly due to rising inflation in Austria, which is currently at almost 7 percent. The annual average rate of inflation is expected to be 6 percent.

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According to the Kronen Zeitung, experts have long called for payroll tax levels to be automatically adjusted with inflation.

Austria’s deficit is also expected to rise to 3 percent this year rather than 2.3 percent as previously anticipated. The debt ratio will not fall below 80 percent of gross domestic product (GDP) as planned for this year.

The budget planning is affected by high energy prices and the war in Ukraine, and Brunner does not expect there to be a balanced budget in Austria until 2026.

What is cold progression?

Cold progression is a tax term used to describe an increased tax burden. It happens when progressive tax brackets (which is Austria’s income tax system) are not adjusted in line with inflation and disposable income gradually decreases. 

Cold progression has also been referred to as a “hidden tax” because even though incomes rise, people’s purchasing power does not as prices continue to rise. However, at the same time, the government collects more money in tax as more people enter a higher tax bracket.

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When will you get your cost of living ‘bonus’ payments in Austria?

Austria's package to fight the rising cost of living includes several "bonus" payments for residents in Austria. Here is when you can expect them.

When will you get your cost of living 'bonus' payments in Austria?

Austria’s federal government has unveiled a series of measures worth billions of euros to fight the cost of living crisis. New steps include increasing family allowances, cutting taxes and sending out one-off welfare payouts, as The Local has reported.

However, the authorities were not specific on when payments are to be expected, though they mentioned most of the measures would be in place “by October”.

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On Wednesday, party leaders Sigrid Mauer (Greens) and August Wöginger (ÖVP) presented a roadmap to lay out when each aid could be expected.

Aid payouts

Low-income and vulnerable people in Austria, such as pensioners receiving minimum payments and aid recipients will receive a one-off €300 payment (Teuerungsausgleich) as compensation for inflation. The date is not set yet but should be in August and September.

The most significant payment will be the €500 sum, which consists of €250 as a climate bonus (Klimabonus) and €250 for the “anti-price increase” bonus (Teuerungsbonus). Everyone in Austria will receive that assistance (children receive half of the total amount) in October.

READ ALSO: Austria unveils €6 billion package to fight rising cost of living

An additional one-off payment of the family allowance (Familienbeihilfe) of €180 will be sent for those already on the program in August.

The timeline, according to Mauer, makes it so that the most vulnerable, including low-income people and families, will receive assistance first. Then, in autumn, the payments will go out on a broader scale.

Changes in bonuses and CO2 tax

The anti-inflation package also contains increases in existing family bonuses and payments.

The family bonus (Familienbonus) deduction increases from €1,500 to €2,000, and the increase for additional children payments (Kindermehrbetrags) to €550 is already in force for the fiscal year of 2022, so it will be valid in 2023.

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The CO2 tax was postponed from July to October in time for the climate bonus payments, which were meant to offset the costs of the tax.

Finally, the end of the cold progression, the term used to describe increases in tax burdens which are based on increases in income but do not account for inflation, is set for 2023.

All the changes still need to be officially approved by Parliament and signed into law. For the measures to take place as soon as possible, a special meeting of the National Council was called for this Thursday, June 23rd.