Although there could be some foundation for the above arguments under given circumstances,
generalizations are difficult. In fact, there is also a series of reasons that point rather to a positive
relation between economic reforms and short-term government budgets.
First, there are reforms with a direct positive impact on budgets. This is for instance the case of
many parametric pension reforms or of labour market reforms (e.g., labour market reforms
reducing the generosity of unemployment subsidies). Moreover, compensation packages to ease
resistance to reforms, if appropriately designed, are not necessarily costly to the budget. Schemes
could be found such that the groups that lose for reforms are compensated via transfers paid by the
groups benefiting from reforms. There are anecdotal cases which seem consistent with this
possibility. The Dutch labour market reform started in 1982 and aimed at supporting wage
moderation was accompanied by cuts in labour taxes and social security contributions paid by
employees. This permitted to reduce labour costs to businesses without losses in net wages.
Employment growth followed from 1984 onward. At the same time, government expenditure was
cut substantially, so that, in spite of the tax cut, the government budget balance improved.
Second, a credible commitment by the government towards medium-term budgetary discipline
could help to win the resistance of groups opposing reforms. Once governments are credibly
committed to sound public finances, the adoption of reforms that permit structural improvements
in public finances in the medium/long term may become easier. Since voters and interest groups
anticipate that know that governments will not loosen budgetary policy to ease the resistance to
reforms, there will be less resistance to reforms in the first place. would be weaker in the first
place. The credibility of government commitment to budgetary discipline is enhanced when there
is a wide perception of the need to take action to reverse unsustainable trends in public finances.
The credibility of government commitment is also strengthened when taken at the international
level. The experience with the pension reforms in several EU countries in the run up to EMU
(Spain, Italy, Portugal) seems consistent with this argument.
Overall, whether a trade-off exists between budgetary discipline in the short run and the adoption
of reforms is mainly an empirical question.
2.3. Structural reforms in the 2005 SGP reform package
On 22 March 2005 the EU head of states and governments endorsed a 20 March ECOFIN Council
report reporting agreed lines for reforming the Stability and Growth Pact (SGP). The ECOFIN
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