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.
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