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

Abstract Fiscal rules are a popular 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 effectively reduces 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 less dissatisfied with their local government and increases the probability of re-election for the incumbent party. These findings suggest that fiscal rules reduce waste and help to align fiscal policy with the preferences of voters in settings, like Colombia, where electoral accountability is hampered by weak political parties and limited career concerns for local politicians.