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Business and Economics > Budgeting

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Cover IMF Working Papers
Reconciling Stability and Growth: Smart Pacts and Structural Reforms
Mr. Roel M. W. J. Beetsma
and
Mr. Xavier Debrun
This paper analyzes the decision of a government facing electoral uncertainty to implement structural reforms in the presence of fiscal restraints similar to the Stability and Growth Pact. The model shows that a pact may harm structural reforms, sacrificing future growth for present stability. The welfare gains brought about by a pact depend on a trade-off between the reduction in the deficit bias and the induced reduction in the amount of structural reform. A pact becomes more attractive (“smarter”) if it takes into account the fiscal impact of structural reforms, in line with a recent proposal by the European Commission.
Keywords:
WP; public goods; Structural reforms; Stability and Growth Pact; Monetary Union; Sanctions; partisan government; budget constraint; deficit bias; incumbent government; Budget planning and preparation; Employment protection; Structural policies; Europe