The fiscal consequences of natural disasters

Abstract

In addition to destroying property and taking lives, extreme weather events can have considerable effects on financial outcomes for governments. Conversely, government policy in the aftermath of a disaster can play an important role in post-disaster recovery. I review the theoretical and empirical effects of natural disasters on various components of a local, regional, or national government's budget. Although a wide range of post-disaster dynamics are theoretically possible, empirical research finds consistently that disasters increase short-run government expenditures and decrease tax revenues at the country level, with some important exceptions. When considering subnational governments, tax revenues are generally unaffected by disasters and increased expenditures are financed largely by transfers from central governments. Foreign aid flows comprise an important source of funding for the central governments of poorer countries. Unfortunately, we know little about returns on mitigation spending or about the effects of additional post-disaster expenditures on economic outcomes, making it difficult to determine the optimal fiscal policy, either prior to or in the aftermath of a natural disaster.