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

Quantifying the cost of inaction

11. One could argue that, before allowing more leeway under the fiscal rules, unproductive spending
should be pruned first, which would probably leave enough room to spend on priority areas, without
running up against the deficit limit. Similar issues relate to reforms, or the lack thereof, of budgetary
frameworks, which are far from being best practice in many EU countries (Joumard et al., 2004). The
design of reforms themselves may also be problematic: perhaps the scope for more cost-effective
approaches is not being exploited. There are many examples of government spending programmes that tend
to undermine growth, come at a high budgetary cost, sometimes grow considerably faster than GDP and are
difficult to reform. They crowd out more productive government spending programmes. As such
programmes tend to push countries towards the Maastricht deficit limit, the question arises whether policy
inaction in such areas should not be taken into account, when granting greater flexibility on spending in
priority areas.

12. The potential sources of fiscal stress built into government programmes are multiple. Fiscal
pressures may mount because of biased incentives of government programmes, for example in the case of
early retirement and disability schemes. The implicit tax on continued work, which gauges incentives to
quit work before the retirement age, is very high in many European countries (Figure 1). There have been
reforms, but most were minor, though Italy lowered the implicit tax a lot between 1998 and 2003. Early
retirement lowers labour utilisation and has fiscal costs that can amount to several per cent of GDP.
Similarly, the number of disability benefit recipients varies considerably across countries and only a few
countries were successful in reducing the number of beneficiaries (Figure 2). In fact, in many countries, the
number of beneficiaries keeps on rising rapidly.

Figure 1. Implicit tax on continued work: early retirement^1,2

1. Average of implicit tax on continued work in early retirement route, for 55 and 60 year olds.

2. EU: 15 European countries excluding Denmark and Greece.

Source: OECD (2005), Going for Growth, Paris.

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