The short-term budgetary implications of structural reforms.
Evidence from a panel of EU countries
Servaas Deroose*
Alessandro Turrini**
Abstract
The EU fiscal framework has been criticized for neglecting a possible trade-off between short-term
budgetary objectives and the implementation of reforms that could improve public finances in the
long term This concern was reflected in the 2005 reform of the Stability and Growth Pact, which
acknowledges that under certain conditions structural reforms can be taken into account both in the
preventive and in the corrective arm of the Pact.
The aim of the paper is that of making a step forward on the understanding of the empirical
relevance of the trade-off between structural reforms in EU countries. The analysis will focus on
product and labour market reforms and pension reforms. The main issue investigated is as follow:
which impact do reforms have on budgets in the short term?
Results show that, in the aftermath of reforms, budgets do not worsen significantly compared with
cases where no reforms occur. However, when the short-term budgetary impact of reforms is
evaluated controlling for the response of fiscal authorities to the cycle and debt developments via
the estimation of “fiscal reaction functions”, there is evidence that product and market reforms and
pension reforms are associated with a deterioration in budgets. The impact appears rather weak (a
primary CAB reduced by few decimal GDP points depending on the specific reform considered)
and not always statistically significant.
*European Commission. DG ECFIN, BU-1, B-1049, Brussels. Tel. 0032/2/2994375, [email protected]
**European Commission and CEPR, DG ECFIN, BU-1, B-1049, Brussels. Tel. 0032/2/2995072,
[email protected]
Acknowledgements: this paper draws upon analytical material prepared for the 2005 Public Finance in EMU European
Commission report and a previous version was circulated as a CEPR Discussion Paper. It has benefited from inputs
from Per Eckefeldt and Werner Roeger and helpful comments from Alfonso Arpaia and participants at a CEBR/CEPR
workshop in Copenhagen and at a seminar at the Federal Reserve in Washington. Xavier Debrun is gratefully
acknowledged for providing the data on structural indexes used in IMF, World Economic Outlook, April 2004.
Disclaimer: The views expressed in this paper represent exclusively the positions of the authors and do not reflect
necessarily those of the European Commission.
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