Séminaire de recherche // IESEG FISCAL RULES, AUSTERITY IN PUBLIC ADMINISTRATION, AND POLITICAL ACCOUNTABILITY: EVIDENCE FROM A NATURAL EXPERIMENT IN COLOMBIA

FISCAL RULES, AUSTERITY IN PUBLIC ADMINISTRATION, AND POLITICAL ACCOUNTABILITY: EVIDENCE FROM A NATURAL EXPERIMENT IN COLOMBIA

BY LUIS MARTINEZ Harris School of Public Policy at the University of Chicago, Co authored with Maria Carreri, University of California, Berkeley

Fiscal rules are a promising tool to improve fiscal discipline and reduce waste in public spending, 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.