and comparing such developments with what happened instead when no reforms where
implemented. A negative budgetary impact of reforms could be due either to direct effects
associated with the reform (e.g., losses of pension contributions in case of systemic pension
reforms) or to costs associated with the need to win resistance to reforms out via increased budgets
(e.g., via subsidies or tax cuts). Due to the absence of systematic evidence on the budgetary impact
of reforms that can be attributed exclusively to direct effects, in the following analysis no
distinction will be made between the direct component and the component associated with the
implementation of compensation schemes.
There is no obvious way in which labour market and product market reforms could impact directly
budgets in the short term. Depending on the particular reforms considered, the effect could be
either negative or positive. For instance, labour market reforms could either contribute to contain
government expenditure if including reductions in unemployment subsidies or raise expenditure if
comprising active labour market policies to promote employability (e.g., training programmes). As
for product market reforms, they can for instance have a direct effect on budgets by altering the
size of government subsidies and transfers to the corporate sector. Although the direct budgetary
impact of labour and product market reforms is likely to be quite limited in the short-run, one
needs to take into account the impact on public budgets that could be associated with the
implementation of compensation schemes.
A first approach to assess the short-term budgetary impact of reforms is to look at the change in
various budgetary items in years immediately following reforms and to compare them with that in
years where no reforms took place. Table 4 reports average changes in primary cyclically-adjusted
primary budgets (primary CABs) and selected components distinguishing between years
immediately following the adoption of reforms and remaining years. T tests are performed to
check whether differences in reform and “non-reform” years are statistically significant.
Results indicate that neither in the case of labour market reforms nor in that of product market
reforms the variation in primary CABs is significantly different in reforms or non-reform years. In
the case of labour market reforms it is observed a weaker reduction in government investment on
average. In the case of product market reforms, the growth in cyclically-adjusted revenues is
significantly lower in reform years, but the effect on budgets is compensated by lower growth in
primary expenditures.
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