The recent approval of the Law on Sustainability and Efficiency of Spending for Ecuador’s Autonomous Decentralized Governments (GADs), promoted under President Daniel Noboa and debated in the Asamblea Nacional, has reignited one of the most important institutional debates in the country: how to balance decentralization with fiscal discipline.
The COOTAD (Territorial Organization, Autonomy and Decentralization Organic Code) is the law that helps to regulate how decentralized governments operate, receive funding and the limits they have with the central government. This reform to the COOTAD establishes a clear rule: at least 70% of local government budgets must be allocated to public investment, while no more than 30% may be allocated to current expenditure (primarily salaries and administrative costs).
Critics argue that this measure undermines territorial autonomy protected under the Constitución del Ecuador 2008. However, it is a necessary correction to structural inefficiencies. For those concerned with incentives rather than rhetoric, the reform deserves a more thorough examination.
This debate is about how to limit power, align incentives, and protect taxpayers. It is easy for those governing to use public budgeting as a tool to establish authority. Power over economic opportunities arises when those who control the budget control employment, contracts, and, as a direct result, political loyalty. For that reason, there must be structural constraints for public spending. Transparent, rule-bound public spending ultimately translates into serving the public. Whereas, in a situation where spending is discretionary, then spending becomes leverage.
The Structural Problem: Current Spending and Distorted Incentives
Budget analysis in many municipalities in Ecuador has been showing strange patterns over the last decade: most of the local budgets seem to be allocated between payrolls, advisory contracts, and administrative overheads. While at the same time, investment in public infrastructure and basic services has been neglected or overlooked.
In some municipalities, current expenditure has exceeded 50% of total budgets, and in certain cases, climbed even higher. This imbalance reduces fiscal space for basic services such as potable water, sewage systems, rural roads, and public maintenance.
However, it would not be adequate to attribute this entirely to corruption. James Buchanan and Gordon Tullock provide an explanation for this phenomenon in the Public Choice theory: When funding from the central government becomes formula-based instead of performance-based, municipalities tend to prioritize budget maximization over optimizing results.
In small municipalities where the local government is one of the primary employers, payroll becomes more than an administrative function, it becomes a political tool. For that reason, we can argue that the growth of bureaucracy is actually incentivized inside the institutions. Providing employment means stability, loyalty, and political support.
The issue is not decentralization itself, but the absence of objective limits on the expansion of local administrative structures.
Autonomy and Constitutional Boundaries
Ecuador’s 2008 Constitution guarantees local governments political, administrative, and financial autonomy. To bring the decision-making process closer to the population, the government was decentralized.
However, Ecuador remains a unitary state under its constitution. National fiscal policy remains a central competence. This creates an inherent tension: autonomy does not equate to complete fiscal sovereignty.
Classical liberal thought—from Friedrich Hayek’s emphasis on dispersed knowledge to modern constitutional economics—does not advocate for the absence of rules. It advocates for general, predictable rules that limit discretionary power.
The 70/30 rule is easy to understand as a general fiscal boundary. There is no dictation of which and how projects should be funded. As it does not specify any order of priority for spending. Since the rule only regulates how budget spending should be composed, projects and decisions remain in the discretion of mayors, prefects, and community councils.
Although this rule limits the amount of budget that is absorbed for administrative purposes. It does not guarantee that spending will not be made on politically convenient projects. The prioritization of spending—whether toward essential infrastructure or symbolic works—remains a local political decision that has the tendency to not be relevant or solve any concern for the population.
The debate, therefore, is not autonomy versus centralization. It is autonomy with fiscal responsibility versus autonomy without constraints. Autonomy without constraints is equally dangerous as autonomy fully constrained.
Visible Projects and Invisible Value
One characteristic of Ecuador’s municipal governance that is sometimes overlooked is the quality of public investments. Projects that do not offer long-term durability or development. This is easier to do in small municipalities where the lack of education and development tricks the population into thinking that having something that does not work is better than having nothing at all.
Local governments often prioritize highly visible infrastructure projects that generate immediate political capital but yield limited long-term economic benefit. This is mostly due to the structure of the political cycle, which is short and favors visible construction rather than long-term planning and restructuring.
The new law does not guarantee high-quality investment. However, it does send an institutional signal: public budgets should prioritize durable public goods over bureaucratic expansion.
Let’s look at this through a libertarian lens. For government spending to exist, it should be mostly directed to benefit the population rather than to sustain administrative growth that offers no measurable outcomes.
Is This Consistent with Libertarian Principles?
At first glance, this regulation can be seen as a form of centralization of power. However, if we analyze it thoroughly, it is about protecting taxpayers and ensuring fiscal responsibility while maintaining transparency and fostering accountability.
This 70/30 rule, if properly applied, does not seek expansion of the government. Rather, it restricts the share of resources devoted to maintaining administrative structures. It creates a structural cap on the portion of public funds absorbed by payroll and operational overhead.
The true risk lies not in the rule’s existence, but in how it is implemented. If enforcement becomes politically selective–rewarding allied municipalities and punishing critics–it would be controversial and foster distrust in the same institutions. Nonetheless, if applied correctly, ensuring equality for all and transparency, it would lead to the building of trust in institutions.
Transparency, The Real Reform Needed
There is a need for transparency. Without transparency, accounting loopholes will be exploited. However, if transparency is achieved, then the percentages can be used as guidelines or safety nets to ensure the correct use of the funds.
The creation of this rule signifies a step towards fiscal discipline. Nonetheless, it should be accompanied by the following:
- Real-time publication of local payrolls
- Open digital access to data
- Independent project evaluation standards
- Comparable performance indicators
- Automatic sanctions for non-compliance
Conclusion
The debate over Ecuador’s new local spending regulation should not be reduced to ideological slogans. Decentralization is valuable because it disperses power. But dispersed power must still be constrained. Limiting excessive current expenditure and prioritizing investment do not undermine autonomy, they condition autonomy on responsibility. Freedom is not preserved by removing all rules. It is preserved by designing rules that limit arbitrary power at the national and local levels alike.
If implemented transparently and predictably, the 70/30 rule represents not a step toward authoritarian centralization, but a move toward fiscally responsible decentralization. Freedom and autonomy should be present to serve the people, not to make the people serve those in government.
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This piece reflects the author’s views, not necessarily the entire magazine. We welcome a range of pro-liberty perspectives. Send us your pitch or draft.
