Cutting Waste Without Punishing Citizens: Colombia’s Lesson on Austerity

Is it possible to implement austerity without paying a social and political price? According to Maria Carreri (Department of Social and Political Sciences, Dondena Research Center, Bocconi University, and CEPR) and Luis R. Martínez (Emory University), the answer is yes, provided you know where to act and take voters’ preferences into account.

In their study published in the Journal of the European Economic Association, Carreri and Martínez focus on a natural experiment that took place in Colombia in the early 2000s: the introduction of a fiscal rule that imposed a cap on administrative spending by municipalities. The result is perhaps unexpected but clear: less waste, stronger accounts, no deterioration in public services and, indeed, an improvement in the electoral prospects for the ruling parties.

From local accounting chaos to institutional change

In the late 1990s, many Colombian municipalities were on the verge of financial collapse. Spending was growing faster than revenue, mainly to maintain oversized administrative apparatuses. By 1999, local deficits had reached such levels that they generated wage arrears, strikes, and lawsuits against municipalities.

It is important to note that the problem was not spending on schools or healthcare, but rather the internal functioning of municipalities: excess staff, consulting fees, and current expenses that were difficult to justify. As the authors write, “waste in procurement, civil service, and targeted transfers amounts to 4.4% of GDP in Latin America.” Furthermore, unlike the Italian experience, for example, municipalities were among the main culprits of Colombia’s fiscal imbalance, and voters had already shown their discontent at the polls with public spending that they perceived as benefiting an elite at the expense of the community.

In 2000, a turning point arrived: the Colombian government introduced a fiscal rule limiting municipal administrative spending to a maximum share of current revenues. Municipalities that did not comply with the cap lost state transfers, and their mayors risked personal sanctions.

A natural experiment to see if the rules work

The rule therefore only affects municipalities that spent too much before 2000. This allows for a credible comparison between municipalities ‘exposed’ and ‘unexposed’ to the reform over almost twenty years. The results are clear: in the municipalities most affected by the rule, administrative spending falls dramatically and the probability of a current deficit plummets. On average, the ratio of administrative spending to revenue is reduced by more than 30 percentage points.

Cut where it matters least

The most interesting data comes later, however. Unlike many austerity policies, the cuts here do not affect services to citizens. Healthcare, education, local infrastructure, quality of life: none of these indicators deteriorated significantly. There are no negative effects on vaccinations, schools, night lighting—used as an indicator of economic activity—or property values. In other words, the reduction in spending mainly affected administrative waste, not essential public goods. “The fiscal adjustment also mostly takes place via cuts to administrative spending and does not compromise public good provision”, write Carreri and Martínez.

The political paradox: more austerity, more consensus

The final surprise concerns politics. Before the reform, parties in power in municipalities in difficulty were systematically punished at the polls. After the introduction of the fiscal rule, the opposite happens: the probability that the mayor’s party will be re-elected increases. Not because voters love austerity per se, but because they stop associating local government with financial chaos and public spending that benefits only a few (those employed by local governments). The fiscal rule eliminates a constant source of discontent.

The authors explain it this way: “Fiscal consolidation leads voters to be less dissatisfied with their local government and increases the probability of re-election for the incumbent party”.

This finding overturns much of the literature on austerity, which often focuses on cuts to welfare and investment. Here, the message is different: not all public spending is equal in the eyes of voters.

A rule that applies everywhere

The Colombian case is also significant for advanced countries, where mayors often have weak incentives to contain administrative spending: short terms of office, fragile parties, high personal costs in reforming the public sector. In this context, an external fiscal rule can function as a “virtuous constraint,” aligning politicians’ choices with citizens’ preferences. Not to impose blind austerity, but to cut where the social cost is lowest and the collective benefit greatest. However, the study highlights that this virtuous circle can exist if and only if the cuts are made where they are needed, without harming services to citizens and affecting rents that reward a few at the expense of the community.

From this perspective, the Colombian case also suggests a deeper link between fiscal rules and trust in democracy: when austerity targets waste and not services, citizens stop punishing those who govern. But the lesson, the authors warn, must be learned with precision. Drawing general conclusions without considering institutional context, administrative capacity and quality of spending can be dangerous, because in other contexts fiscal rules risk weakening—not strengthening—democratic accountability.