The Short-Term Budgetary Implications of Structural Reforms: Evidence from a Panel of EU Countries

41 Pages Posted: 7 Oct 2005

See all articles by Servaas Deroose

Servaas Deroose

European Commission

Alessandro Turrini

European Commission; Centre for Economic Policy Research (CEPR)

Date Written: September 2005

Abstract

The EU fiscal framework has often 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 recent 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 labor market reforms and pension reforms. The main issue investigated will be 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.

Keywords: Deficits, structural reforms, stability and growth pact

JEL Classification: E62, H50, H55, H62, J58, L50

Suggested Citation

Deroose, Servaas and Turrini, Alessandro, The Short-Term Budgetary Implications of Structural Reforms: Evidence from a Panel of EU Countries (September 2005). CEPR Discussion Paper No. 5217, Available at SSRN: https://ssrn.com/abstract=822810

Servaas Deroose

European Commission ( email )

Office BU1 0/201
B-1049 Brussels
Belgium
+32 2 299 4375 (Phone)
+32 2 299 3505 (Fax)

Alessandro Turrini (Contact Author)

European Commission ( email )

Office BU-10/113
B-1049 Brussels
Belgium
+32 2 299 5072 (Phone)
+32 2 299 3505 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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