The political economy of structural reforms under a deficit restriction

This paper analyzes the incentives of a government facing electoral uncertainty to implement structural reforms in the presence of a deficit restriction. In designing a reform package, the government faces a trade-off between enhancing its electoral chances by providing compensation to private individuals and the cost of violating the deficit restriction. Ceteris paribus, tighter sanctions, more volatile macroeconomic shocks and lower income inequality worsen the trade-off. JEL classification: E62; H11; H30; H50 Keywords: Structural reforms; Deficit restriction; Compensation; Elections; Stability; Growth pact