An Empirical Investigation of the Relationship between Local Government Budgets, IT Expenditures, and Cyber Losses

Abstract

Information technology (IT) is the key component of e-government infrastructures, but at the same time, it makes governments more exposed to the cyber risk. In this study, we take an empirical approach to investigate the cyber risk in the public sector. We describe the most common cyber threats facing local governments and build linear models to explain the relationships between cyber losses, local government budgets, and IT expenditures. We find that local governments are affected by cyber incidents more frequently, and disruption incidents that lead to the malfunction of e-government services are on the rise. In addition, the magnitude of cyber losses used to have a strong positive relationship with the affected governments' budget size. However, in recent years, this relationship is weakening, and small local governments are more heavily impacted by cyber incidents than before. Our findings further suggest that investing in information technology is becoming more effective in terms of lowering the loss-to-budget ratio. However, this also means local governments with small budgets do not benefit from this change as much as the large ones do.