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

Abstract

Fiscal rules are a promising tool to address waste in public administration, 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, which suggests wasteful administrative spending before the reform. Third, the fiscal consolidation does not cause a political backlash. Electoral support for the party of the incumbent mayor increases and the incidence of protests weakly decreases. These findings suggest that fiscal rules can align fiscal policy with the preferences of voters in settings, like Colombia, with weak political parties and limited career concerns for local politicians.

Keywords: Fiscal rules, public administration, public goods, political accountability, decentralization

JEL Classification: H11, H72, H75, O23, D72, D73