Incumbency and expectations of fiscal rule compliance: Evidence from surveys of German policy makers

Abstract

We analyze politicians’ expectations about future compliance with a fiscal rule, and in particular the dependence of the expectations on their role in parliament (opposition vs. incumbent government coalition). We study this in the context of the German debt brake, which became a constitutional provision in 2009 but is binding for the sub-national states from 2020 onwards only. Via a unique survey, we analyze compliance expectations of parliamentarians of all 16 German state parliaments. A strong incumbency effect is identified from parliamentarians who move in and out of government, showing that politicians from the governing coalition are more optimistic than those from the opposition. A negative fiscal shock has little effects on the former, but a strongly negative one on the latter. We offer a theoretical model that is consistent with an increasing incumbency effect over time, as the result of wishful thinking by politicians concerning their reelection chances and a dynamic reputation effect for policymakers when compliance with the fiscal rule is achieved. • Analyze politicians' expectations about compliance with the German debt brake. • Use customized survey of parliamentarians of all 16 German state parliaments. • Identify an incumbency effect: government politicians are more optimistic than from opposition. • Theoretical model builds on wishful thinking by politicians concerning their reelection chances.