Proceedings from the ECFIN Workshop "The budgetary implications of structural reforms" - Brussels, 2 December 2005

should therefore ideally be treated as such -an issue tackled here through system GMM estimates
but which deserves further attention.

Against this backdrop, the SGP might be seen to prevent an optimal inter-temporal
management of fiscal policy, which in theory should allow for a short-run deterioration of public
finances followed by a gradual improvement as the structural output gains of reforms materialise.
However, the recent reorientation of the SGP should in principle have made the use of fiscal
policy to accommodate structural reform easier.107 Furthermore, accommodation remains of
course perfectly feasible all along for countries that undertake reform from a position of close to
budget balance or surplus.

⁷.       For instance, a recent paper by Beetsma and Ribeiro (2005) develops a political economy model to study the interaction between

structural reforms and the need to adhere to the Stability and Growth Pact (SGP). In designing a reform package, governments are faced with a
trade-off between reducing electoral uncertainty via monetary compensation to reform losers and abiding by the deficit limits of the SGP. Within
this context, the authors show that looser sanctions and/or sanctions that take account of reform efforts or the business cycle should all facilitate
the implementation of reforms.

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