Preface
Most of the reforms discussed within the framework of the Lisbon strategy will benefit public
finances in the long term. However, in the short-term, there could a trade-off between some
structural reforms and budgetary discipline. This possible tension between reforms and fiscal
discipline was identified by academic economists as a possible drawback of the Stability and
Growth Pact since its inception.
As a result of the 2005 reform of the Stability and Growth Pact, the EU fiscal framework now
contains elements that allow better taking into account the budgetary impact of structural reform.
These provisions permit to modulate the implementation of the Stability and Growth Pact in case
of major structural reforms both in the preventive arm (the definition of medium-term budgetary
objectives and the adjustment towards them) and in the corrective arm of the Pact (the Excessive
Deficit Procedure). In the coming months and years, ensuring an implementation of the Stability
and Growth Pact that takes appropriately into account structural reforms will be a major challenge.
The Council Regulations codifying the reform of the Stability and Growth Pact define conditions
under which structural reforms could be considered in the EU fiscal framework. However, there
are aspects open to judgement by the Commission and the Council. Adequate knowledge about the
interactions between structural reforms and public budgets will be crucial for an economically
sound use of this judgement.
Unfortunately, to date there has been relatively little research on the relationship between
structural reforms and government accounts. The workshop “Budgetary implications of structural
reforms” organized on 2 December 2005 by DG ECFIN of the European Commission aimed at
filling this gap. This issue of the DG ECFIN Economic Paper series collects the papers presented
at the workshop.
Some of the papers (Andersen, Giorno, Hoeller and Van den Noord) focus on the budgetary
impact of structural reforms over the long term and analyse the long-term implications for public
finances of policies aimed at reforming social security or the functioning of markets via
equilibrium modelling techniques. These papers highlight how the impact of structural reforms on
the future path of government budget balances and debt is driven by the interaction between the
specific design of the reform, the functioning of the tax system and the social security system, and
the overall macroeconomic environment.
Other papers (Deroose and Turrini, Roeger) focus on the impact of structural reforms on budgets
over the short and medium run. Reforms may hurt budget balances because implying a direct cost
in terms of higher expenditures or lost revenues. The most relevant example is that of pension
reforms shifting funded pillars outside the government sector. However, indirect costs could arise
if political resistance to reforms is countered to some degree by a compensation of interest groups
via tax cuts or targeted increased expenditure. These papers aimed at measuring the impact of
different types of reforms on public budgets via modelling or econometric techniques.
Finally, there are papers (Duval, Heinemann) attempting to answer the question whether the
pursuit of budgetary discipline could be a deterrent for structural reforms. The aim is to test the
widely quoted argument that a tight fiscal stance reduces the “political capital” available to
governments, thereby reducing the feasibility of policies that encounter opposition from interest
groups. The analysis in this case is not on the impact of reforms on budgets but, the other way
round, on the impact of the fiscal stance on the probability of reforms.