Interesting research by Carreri and Martinez on the impact of fiscal rules at the subnational level in Colombia. Briefly, it reduced overspending without affecting public goods or living standards, and aligned with voters' preferences. Here is another related study by Bianchi et al (2021) in Italy where they find that fiscal decentralization reduced local spending but expanded municipal services, and it also increased female labor supply.
Abstract from a recent article on VoxDev:
[...] In recent research (Carreri and MartÃnez 2021), we study a sub-national fiscal rule introduced in Colombia in 2000. This rule was the national government’s response to a growing fiscal imbalance associated with the country’s decentralisation process from the early 1990s. The rule set a cap to the operating expenses of municipal governments, expressed as a share of their current revenue. For the municipalities in our sample (90% of the total), which are smaller, less developed, and have a homogeneous institutional structure, this cap was set at 80%. Compliance with the rule is determined every year by the country’s fiscal watchdog agency and non-compliers face disciplinary sanctions from the Inspector General’s office. They also lose access to financial assistance from the national government.
Current revenue includes local tax revenue, fees and fines, and some formula-determined intergovernmental transfers. This is the denominator of the fiscal outcome targeted by the rule, which we refer to as the ‘overspending indicator’. Operating expenses (i.e. the numerator) include remuneration of administrative staff, general expenses such as procurement, rent, maintenance, travel, and training, as well as pensions of former employees and payments dictated by court sentences. Importantly, all expenses associated with local public goods (education, health, water, sanitation, culture, etc.) are classified as investment and fall outside the scope of the regulation.
Even though the fiscal rule affected all municipalities de jure, only those with operating expenses exceeding the cap at the time of the reform were exposed to it de facto. Our research design exploits this variation in exposure and examines whether municipalities affected de facto by the fiscal rule experienced disproportionate changes in our outcomes of interest after the reform. These outcomes include fiscal variables, various measures of public goods and living standards, as well as electoral support for the local incumbent party and incidence of protests.
The result:
- Fiscal rule reduced overspending in public administration
- Fiscal rule did not affect public goods or living standards
- Voters rewarded incumbent parties for fiscal restraint
