Explanation:

Front loading

The most important lesson when it comes to putting in place structural reforms is that they should be front loaded. Most reforms that increase labour supply, reduce threshold to the labour market, reduce regulatory barriers, or open sectors to more international competition have different long- and short-term effects. In the short run, there will be losers. Those who have worked in protected industries will see lower wage premiums. More labour market flexibility will reduce job security and increase turnover. Those who feel these negative effects are likely to voice their discontent. But in the long run, higher productivity means better real wages and increased labour supply, which will eventually increase the employment ratio and reduce SOCIAL exclusion. The medium-term gains for society as a whole might offset the short-terms costs for certain groups.

The political implications are clear. When structural reforms are implemented close to an election, the short-term IMPACT will dominate the debate, and the more nebulous long-term gains will be written off as uncertain forecasts. Gerhard Schröder is maybe the clearest example of this. Between 2003 and 2005, the SPD government cut taxes, tightened unemployment benefits, introduced local exceptions to the wage bargaining system to prevent job losses, increased pressure to participate in active measures, and created “mini jobs” to increase employment opportunities. Unemployment in Germany fell from 12% in 2005 to 5% in 2014, probably one of the most successful turnarounds in Europe. Schröder lost the election in autumn 2005. Had he initiated the process directly after the 2002 election, might he have been re-elected?

Front loading is also important because of how structural reforms impact public finances. If you cut taxes for low-income earners and finance it through tighter welfare benefits, increased labour force participation will reduce EXPENDITURE. That’s because fewer people will enter the welfare system and tax revenues will increase as those remaining in the labour market continue to pay taxes. Given that standard models for FORECASTING public finances are static in the sense that BEHAVIOURAL changes are not fully taken into account, actual outcomes are likely to surpass forecasts. This means that a front-loaded reform programme creates unexpected fiscal space. If reforms are implemented directly after an election, there will be room to spend in the re-election campaign.

Keep it simple!