Fiscal Rules, Austerity in Public Administration, and Political Accountability: Evidence from a Natural Experiment in Colombia

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Please find below the abstract of the paper.

Fiscal Rules, Austerity in Public Administration, and Political Accountability: Evidence from a Natural Experiment in Colombia

Fiscal rules are a promising tool to overcome chronic public deficits, but their effectiveness and political feasibility remain unclear, particularly in weakly institutionalized settings. We leverage exogenous variation across Colombian municipalities in exposure to a fiscal rule that limits the operating expenditures of local governments. Our difference‐in‐differences analysis yields three main findings. First, the fiscal rule is highly effective at reducing operating expenditures and the probability of a current deficit. Second, there is no meaningful impact on local public goods or living standards. Third, the fiscal consolidation leads voters to be more satisfied with their local government and to re‐elect the incumbent party at higher rates. These findings suggest that fiscal rules can reduce waste in public administration and can help to align fiscal policy with the preferences of voters in settings, like Colombia, with weak political parties and limited career concerns for local politicians.