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

Real GDP growth

2005    2006    2007    2008    2009    2010    2011    2012

cuts in social contrib.        ^^^“baseline

unchanged real govt. expend. — — — unchanged struct. bal.

Figure 10. Simulated impact of a reduction of the NAIRU in a large euro country (France) under alterative fiscal
assumptions

Inflation

Output GAP

Unemployment rate

2.5

2.4

2.3

2.2

2.1

²

1.9

1.8

1.7

1.6

1.5

Potential output growth

Structural fiscal balance (% of GDP)

Fiscal balance (% of GDP)

Net government debt (% of GDP)

Note: The Nairu is assumed to fall progressively by 1.5 percentage points in the first three years of the simulation.

Nominal exchange rate kept unchanged relative to baseline. Real interest rates at the euro level are maintained
unchanged relative to baseline.

55. The econometric exercise in this paper provides additional evidence that the budgetary cost of
structural reform has been rather limited, whereas the longer-term benefits are significant. Probably nobody
would contest this general finding, but it is useful to be able to put some numbers on it. They broadly
concur with similar findings by Deroose and Turrini (2005), although they focus on the fiscal position
rather than on public expenditure. Obviously these findings are ex post and they may not apply to the

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