Fiscal rules and compliance expectations – Evidence for the German debt brake

Abstract

Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW. Fiscal Rules and Compliance ExpectationsEvidence for the German Debt BrakeFriedrich Heinemann (ZEW Mannheim and University of Heidelberg)Eckhard Janeba* (University of Mannheim, CESifo and ZEW)Christoph Schröder (ZEW Mannheim)Frank Streif (ZEW Mannheim) May 2014Abstract: Fiscal rules have become popular to limit deficits and high debt burdens in industrialized countries. A growing literature examines their impact based on aggregate fiscal performance. So far, no evidence exists on how fiscal rules influence deficit expectations of fiscal policy makers. In the context of the German debt brake, we study this expectation dimension. In a first step, we introduce a simple dynamic model in an environment characterized by the lagged implementation of a new rule. Lagged implementation characterizes the setup of the German debt brake and raises credibility issues. In a second step, we analyze a unique survey of members of all 16 German state parliaments and show that the debt brake's credibility is far from perfect. The heterogeneity of compliance expectations in the survey closely corresponds to our theoretical predictions regarding states' initial fiscal conditions, specific state fiscal rules and bailout perceptions. In addition, there is a robust asymmetry in compliance expectations between insiders and outsiders (both for in-state vs out-of-state politicians and the government vs opposition dimension), which we attribute to overconfidence rather than noisy information. These results suggest that national fiscal rules can be strengthened through nobailout rules, sustainable initial fiscal conditions and complementary sub-national rules. JEL Classification Code: H6, H7

Never Change a Winning Policy? Public Sector Performance and Politicians' Preferences for Reforms

“…As 592 of the collected email addresses were inactive and 7,843 council members actually received the survey invitation, this yields an overall response rate of 46 percent (municipality‐specific response rates vary from 3 percent to 73 percent). We conducted the survey with an explicit guarantee that all individual responses would be treated fully confidentially, which reduces the potential self‐serving biases in responses and benefits truthful replies (Heinemann et al ).…”

“…Still, studies linking performance to reforms should not only investigate administrative behavior but also assess the preferences and/or behavior of political decision makers (Heinemann et al ). Currently, there is “less systematic evidence on how performance data alter political beliefs” (Nielsen and Moynihan , 3), which constitutes our first contribution.…”

Do fiscal rules constrain political budget cycles?

“…For instance, Eliason and Lutz (2018) do not find evidence that one of the most stringent sets of fiscal rules in the United States, i.e., Colorado's Taxpayer Bill of Rights, affected the levels of taxing or spending there. Likewise, based on answers from 639 politicians who provided responses about compliance with Germany's debt brake for its 16 federal states, Heinemann et al (2016) report that the debt brake's credibility among policy makers is far from perfect. 7 Some evidence in favor of the effect of fiscal rules on fiscal manipulation at the subnational level has been reported.…”

European Monetary Union reform preferences of French and German parliamentarians

“…Strong incumbency effects were found byHeinemann et al (2016) in a survey among members of German state parliaments addressing the issue of compliance with a national fiscal rule. See alsoMaatsch (2016) for an analysis of cleavages based on plenary debates.…”