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 behavior 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.

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