Do Fiscal Restraints Harm Test Scores? Evidence from Italy
52 Pages Posted: 27 Feb 2021
Date Written: December 23, 2020
Most countries discipline their public budget through a set of fiscal rules aiming at limiting public debt accumulation. Yet, apart from the direct effect on public finance outcomes, there is limited evidence on whether these policies affect broader socio-economic outcomes. This paper provides regression discontinuity estimates of fiscal rules-induced school spending drops on test scores of Italian students. We show that school spending per-pupil is around 102 euros lower in municipalities subject to fiscal restraints. Using longitudinal data on pupils’ attainment in national test at the beginning and the end of primary school, we find that spending differences lead to a gap in standardized test score gains of nearly 12 percent of a standard deviation. The impact is particularly strong for lower socio-economic groups. We find that both the lack of several basic instructional tools and limited investments in school facilities explain most of the observed achievement gap. Our results reveal how fiscal restraints can create “unintended” consequences for younger generations and exacerbate cross-generation inequalities when governments need to reduce public spending.
Keywords: school spending, test scores, fiscal rules, regression discontinuity design
JEL Classification: I22, I24, H52, H75
Suggested Citation: Suggested Citation