Fiscal rules are laws aimed at reducing the incentive to accumulate debt, and many countries adopt them to discipline local governments. Yet, their effectiveness is disputed because of commitment and enforcement problems. We study their impact applying a quasi-experimental design in Italy. In 1999, the central government imposed fiscal rules on municipal governments, and in 2001 relaxed them below 5,000 inhabitants. We exploit the before/after and discontinuous policy variation, and show that relaxing fiscal rules increases deficits and lowers taxes. The effect is larger if the mayor can be reelected, the number of parties is higher, and voters are older.
Grembi, Veronica, Tommaso Nannicini, and Ugo Troiano.
"Do Fiscal Rules Matter?"
American Economic Journal: Applied Economics,
State and Local Taxation, Subsidies, and Revenue
State and Local Budget and Expenditures
State and Local Borrowing
Finance in Urban and Rural Economies