Short-Term Pain for Long-Term Gain: The Impact of Structural Reform on Fiscal Outcomes in EMU
16 Pages Posted: 15 Feb 2012
Date Written: March 30, 2006
This paper discusses one particular aspect of the reform of the Stability and Growth Pact: the possibility of temporarily breaching the 3 percent deficit limit in the event of an effective but initially expensive structural reform. Van den Noord and Cournède use econometric techniques to provide evidence that the upfront budgetary cost of structural reform is small compared with the longer-term benefits for expenditure and revenue levels. On the basis of their findings, the authors claim that there is a need for caution when using the greater margins for flexibility provided by the revised Stability and Growth Pact and argue that, since the fiscal costs of successful structural reform tend to be small and short-lived compared with the long-run benefit, any breaching of the 3 per cent deficit threshold should be limited, temporary and conditional on a detailed assessment of the short-term costs and long-term gains of the reform.
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