Macroeconomic Effects of Simultaneous Implementation of Reforms

Abstract

This paper evaluates the macroeconomic effects of simultaneously implementing growth-friendly fiscal consolidation and competition-friendly reforms in one European country by simulating a dynamic general equilibrium model. Our results are as follows. First, in the case of joint implementation, the increase in gross domestic product (GDP) is larger than the sum of GDP increases obtained from implementing reforms separately. Growth-friendly public debt consolidation uses lower interest payments in the long run to permanently reduce tax rates, and competition-friendly reform expands the tax base, allowing for further rate reductions. Second, the medium-term output loss associated with the temporary increase in taxes during the fiscal consolidation is mitigated by its implementation alongside the competition-friendly reform, whose expansionary effects limit the tax rate increase. Third, in the short run (the first two years), all measures imply a macroeconomic cost in terms of output loss, which is smaller than the permanent output gain in the long run.