2.2 The findings in the literature
In their time series cross section analysis for the reform experience of OECD countries, Helbling
et al. (2004) identify the level of a cyclically adjusted primary balance as a significantly positive
determinant of trade deregulation and labour and product market reforms. The change in the
balance is significantly negatively related to reforms of labour market and the tax system.
Annett et al. (2004) replicate this finding for labour market reforms in the sense that reform
processes tend to be characterized by increasing deficits. For product market, on the contrary,
reforms are accompanied by improving government finances.
In its descriptive part of the analysis for EU countries, Deroose and Turrini (2005) have a closer
look into different components of the budgets and compare reform with no-reform periods. No
significant differences in the overall balance for pension, labour market and product market
reforms are found. Some significant differences are detected for single budgetary components: as
expected pension reforms tend to reduce social spending and for product market reforms
decreasing revenues are matched by decreasing expenditures.
The authors also estimate fiscal reaction functions linking the cyclically adjusted budgetary
balance to the output gap, the debt level and reform dummies where the labour market reform
dummy has a significantly negative impact on the balance while this is not the case for product
market and pension reforms. A probit analysis indicates that higher debt levels increase the
likelihood of labour and product market reforms and that a favourable budgetary balance tends to
simplify product market reforms. Again, labour market reforms are associated with increasing
deficits, at least after 1993.
In their probit estimation for OECD countries 1985-2003, Duval and Elmeskov (2005) include the
by now standard fiscal variables (level and change in the cyclically adjusted surplus) and - for a
pool of labour and product market reform events - support the view that a sound fiscal situation is
helpful for reforms while the change in the surplus is insignificant throughout.
Looking at the literature as a whole it appears by now a well established fact that a good
budgetary situation measured by the budgetary balance is typical for the eve of reform while there
is some indication that - mostly for labour market reforms - increasing deficits accompany the
reform period.
138