It took three failed attempts to form one, and the longest period of inter-party negotiation in Austrian history, but there is finally some knowledge of what the government of the next five years might be. The conservative Austrian People’s Party (ÖVP), the Social Democratic Party of Austria (SPÖ), and liberal The New Austria and Liberal Forum (NEOS) now hold 108 of 181 parliamentary seats—an outcome that notably leaves the populist-nationalist FPÖ, the election’s surprise winner, out of power.
This three-way coalition emerged only after previous negotiations, including a failed attempt at a deal between the ÖVP and the FPÖ, and an early breakup when NEOS walked away, citing irreconcilable differences with the SPÖ. Now, offering changing geopolitical dynamics and a supposedly renewed perspective from the SPÖ (despite its leader’s Marxist past) as explanations, the three parties claim to have found common ground.
The task ahead is daunting. Austria is currently facing one of its longest recessions, and potential EU-mandated deficit corrections. Equally pressing is the question of whether these ideologically divergent parties- especially the market-friendly NEOS and ÖVP versus the more socialist SPÖ- can actually work together, or if their differences will lead to a gridlock and endless debates, possibly paving the way for new elections and an FPÖ resurgence.
The Long Road to a Government Formation
It took the new coalition 152 days and multiple rounds of negotiation to produce a 210-page government proposal titled “Do the Right Thing Now. For Austria” – a title that many political analysts find ironic, given that the most urgently-required economic changes have been postponed. This marks the third attempt to form a government after the initial SPÖ–ÖVP–NEOS talks in January broke down, compounded by a failed ÖVP–FPÖ deal that collapsed over staffing disagreements.
Less than two months ago, the head of NEOS abruptly exited the negotiating table, arguing that adhering to her party’s free-market and fiscally disciplined approach- which favors lower taxes and minimal state intervention- would yield no progress, especially on contentious issues like the budget and pensions that clash with social democratic priorities emphasizing expanding welfare and public spending.
In the early stages, negotiations involved a wider range of possibilities. However, after the first failed attempt, former ÖVP leader and chancellor Karl Nehammer stepped aside to allow fresh coalition options. With NEOS and the SPÖ consistently warning against an FPÖ-led government—and against FPÖ leader Herbert Kickl as chancellor—the possibility of a far-right takeover loomed large. This shared fear seems to have pushed the three parties together, suggesting that this coalition is more a compromise borne of necessity than a proactive, reformist agenda. In times of extreme economic uncertainty, such a necessity-driven coalition carries its own risks.
What Do the Coalition’s Policies Look Like?
Fiscal and Economic Policies
At first glance, some of the new budget measures might seem economically sound, promising efficiency improvements and streamlined government processes. However, these initiatives are disappointingly vague, merely postponing major reforms to an undefined future. The coalition plans to extend “temporary” taxes and raise others, despite Austria’s already burdensome tax rates, while much-needed payroll tax reforms to boost competitiveness remain half-hearted. Even a promising proposal like the creation of a Dachfonds—a fund that pools resources to support start-ups—is undermined by the simultaneous increase in taxes. With the new finance minister from the SPÖ favoring higher taxes to balance the budget and a partial rollback of “cold progression” tax relief, the approach appears to be focused more on fiscal short-termism than genuine economic renewal. Moreover, the absence of a concrete expenditure brake or debt rule—as seen in Switzerland—raises serious concerns about long-term fiscal sustainability.
Social and Regulatory Measures
On the regulatory front, the coalition’s approach appears to favor incremental tweaks and temporary fixes over comprehensive, bold reforms. For example, instead of overhauling public service delivery or cutting red tape across industries, the government has implemented minor adjustments such as modest increases in regulatory compliance requirements, temporary subsidies to bolster public welfare programs, and limited changes to licensing procedures. While these interventions are presented as necessary to protect vulnerable groups and maintain fiscal stability, they risk creating a labyrinth of bureaucracy that could stifle innovation and efficiency. Ultimately, the policy mix prioritizes short-term fiscal comfort over the structural reforms that free-market proponents argue are essential for long-term growth and competitiveness.
The Future in Sight
If the coalition’s compromise-oriented approach persists, Austria faces a prolonged recession and a steady decline in industrial competitiveness. This trajectory threatens everyday citizens through rising unemployment and diminishing purchasing power, while businesses confront an uncertain environment that undermines investor confidence. In contrast, bolder free-market reforms—real changes in spending and taxation, coupled with a decisive rollback of excessive regulations—could signal a clear path to recovery. Such measures would demonstrate to investors and businesses that there is light at the end of the tunnel, fostering structural changes in government efficiency and economic competitiveness. As recently noted by WIFO, Austria’s leading economic research institution, the ongoing recession underscores the urgent need for significant reforms to secure long-term growth.
Despite the inclusion of a liberal party alongside its more interventionist partners, the coalition’s prospects appear bleak, especially in light of similar three-party arrangements in Germany that collapsed abruptly and even led to the ejection of the liberal faction from parliament. Given these circumstances, the future performance of this government remains highly uncertain. Blueprints for genuine reform are plentiful. For instance, recent analysis by Agenda Austria (a liberal think tank) suggests such measures such as introducing a two-tier flat tax to incentivize full-time work, streamlining regulations through clearer legal frameworks, cutting bureaucratic red tape, and enhancing competition in sectors like energy and finance. These structural reforms, which have spurred growth in economies like Switzerland and Sweden, could boost investor confidence and foster sustainable economic renewal. But the key takeaway is clear: only an adherence to sound economic principles and bold, market-friendly reforms can restore long-term growth and stability in Austria.
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