(2003, 2005)). Relatively few work exist instead attempting to estimate empirically whether fiscal
consolidation has a negative impact on the probability of carrying out economic reforms.
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 market, labour market and pension reforms. The main issue investigated will be the
following: which impact do reforms have on budgets in the short term? Due to lack of systematic
data on the direct budgetary impact of the type of reforms considered, the analysis will not
disentangle the direct budgetary impact of reforms from the impact arising via the payment of
“compensation packages” to ease resistance to reforms. There is instead an attempt to: (i) perform
a disaggregated analysis in the change in relevant government revenue and expenditure items (e.g.,
social security contributions, social transfers,...) in reform and non-reform years; (ii) control for
other factors that may have contributed to short-term budgetary developments (e.g., output and
debt stabilization objective by fiscal authorities) via the estimation of “fiscal reaction functions”
(see, e.g., Gali and Perotti (2003)).
Indicators of structural reforms are constructed starting from indexes on regulatory restrictions
used in IMF, World Economic Outlook, April 2004. Indicators of pension reforms are based on the
information provided in the Fondazione Rodolfo De Benedetti database. While indicators on
labour market and product market reforms represent sufficiently large reductions in regulatory
restrictions, indicators of pension reforms refer to enacted legislative changes concerning pension
systems. The dataset used in the analysis comprises observations on EU-14 for the 1970s (in the
case of labour market and product market reforms), the 1980s and the 1990s. In spite of limitations
related to small sample size and quality of reform indicators, a number of results of interest
emerge.
On average, the evolution of the primary cyclically adjusted budget balance is not significantly
different in the aftermath of reforms compared with years not following reforms. Product market
reforms are associated with slower growth in government revenues - accompanied, however, by
correspondingly slower growth in expenditure. After pension reforms, social benefits paid by the
government grow at a significantly slower rate, but the overall impact on the budget is
compensated by government revenues also growing at a slower rate. There is also evidence
suggesting that the impact of reforms can be quite different depending on the characteristics of the
reform, notably whether it mainly introduces parametric changes or also allows for systemic
changes in the national pensions framework. Estimating the budgetary impact of reforms after
controlling for the response of fiscal authorities to the cycle and debt developments, there is
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