Tight belts, different cuts: How political preferences shape the effects of fiscal rules

While fiscal rules are often viewed as an effective way to curb the deficit bias arising from, inter alia, partisan pressures in common-pool budget settings, much less is known about how their effects vary with partisan preferences. This paper fills that gap by estimating local projections for a panel of EU-27 countries over 1995-2019. We innovatively link COFOG expenditure categories with the Manifesto Project Database to study how political preferences condition the impact of tighter fiscal rules across spending functions. Our first result is that more stringent national fiscal rules are associated with lower public spending in the short-and medium-run. Digging deeper, we show that the recomposition of expenditure under tighter rules depends on governments' preferences: adjustment falls disproportionately on categories that are less favoured by the incumbent. These results are robust to alternative estimators, different definitions of the dependent variable, and placebo tests. Lastly, the cuts associated with stricter fiscal rules in low-preference government contexts are amplified when sovereign debt yields are higher.