Long run effects on employment and GDP in the OECD countries

The European fiscal compact has introduced fiscal rules of budget balance in the EU, in addition to rules limiting the growth of the debt ratio to GDP. The objection arises that budget balance rules have an adverse effect on employment especially in the long run. We test this proposition by investigating, with a panel of 22 OECD countries (1980-2009), the relationship between Non-Accelerating Inflation Rate of Unemployment, NAIRU, as dependent variable, the underlying net lending government as a percentage of potential GDP (UNLG/pot.GDP), and the general government total receipts as a percentage of GDP, controlling the results with additional variables which may be credited to impact on NAIRU also in the short term. We find that UNLG/pot.GDP may be both relevant in increasing the NAIRU in the long run, even if the inverse relations may also be true. In the short term there is no significant effect of these variables. An increase in fiscal burdens may have similar long run negative effects  Results are robust to the presence of cross section correlation. These results suggest that the assert that the constitutional rule of balancing the budget may create unemployment does not find an empirical evidence. Also the policy of balancing the budget via tax increase may have long run adverse effects on employment. Thus a mere budget balance rule without limits to the tax burden might damage the long run employment level. They also suggest that further analysis should be carried out to test whether exogenous cause of a high NAIRU may impact on the budgetary deficit, thus making harder to adopt this rule.