Budgeting for disasters

Abstract

Some ways of budgeting for disasters have the potential to increase welfare by increasing national savings, reducing exposure to risk and promoting mitigation prior to a loss. Those ways can also contribute to aggregate fiscal stability over the long term. The power of budgeting, however, can be misdirected to increase losses and lead to fiscal instability. This paper describes the potential for gain from alternative budgetary treatments of policies aimed at reducing the effects on consumption of random shocks to income and wealth. It identifies a critical difference between alternatives: budgetary recognition of expected costs of relief and recovery before the loss event. We classify those different methods as ex ante and ex post budgeting. We also consider some budgetary mechanisms that can promote effective recognition and constrain opportunistic behaviour by elected officials. Finally, this paper describes related budgetary practices in some OECD countries. Many have instituted policies consistent with ex ante budgeting, but we have insufficient information to determine their effectiveness.

Climate Change Adaptation and Financial Protection

“…Countries that have adopted contingency funds for climate risks have also taken measures to insulate the resources from political pressure for reallocation. These include moving the fund out of the main budget, with the provision of a clear legal framework for how those funds can be used (Phaup & Kirschner, 2010). For example, the budget allocated to Mexico's FONDEN operates as a separate trust.…”

Financial Support Mechanisms and Financing Instruments for Climate Change Adaptation

“…The government budget is at ¥4.5 trillion ($49.9 billion) each year on average for disaster management from 1995 to 2004. Phaup and Kirschner (2010) [8] document that the budget for disaster management is separated into four fields, including scientific technology research (1.3%), disaster prevention and preparedness (23.6%), national land conservation (48.7%), and disaster recovery and rehabilitation (26.4%).…”

Is the Indonesian disaster response budget correlated with disaster risk?

“…These disasters cost the lives of many people and severely affect the economy across the domestic regions. Phaup and Kirschner (2010) report that Indonesia experienced infrastructure losses of approximately $4.5 billion in the Indian Ocean earthquake and tsunami of 2004.…”

“…Ex-ante budgeting may lead to preventive strategies that are more effective and to the promotion of a disaster mitigation programme (Dartanto, Bastiyan & Sofiyandi 2017). However, budgeting for disaster mitigation programmes can have several major challenges, that is, political incentives to delay the recognition of costs for a DB until the disaster happens; moral hazard and the belief that it is impossible or at least difficult to save government money for disasters (Phaup & Kirschner 2010). Notwithstanding, this many budgets for disasters or expenditures are not easy to be traced as they are indirectly contributed to disaster mitigation and prevention (De La Fuente 2010).…”