Abstract
Disasters have both short- and long-term fiscal consequences, such as deteriorating fiscal balances, economic contraction, and increasing public debt. Beyond these costs, disasters also cause reallocations in government budgets. During COVID-19, governments with constrained fiscal space or limited pre-arranged sources of funds (such as reserve funds or insurance) were forced to raid their existing budgets and reallocate funds to finance the COVID-19 response, including to the health sector. While such actions are necessary, they crowd out other important planned public expenditures, presenting an opportunity cost in terms of forgone or delayed returns. Yet, across the world, budget reallocations are poorly documented and rarely quantified.
The World Bank, FCDO, and the Centre for Disaster Protection, through its partner Oxford Policy Management, has analysed the scale and incidence of budget reallocations and their impact during COVID-19 in Albania, Ethiopia, Pakistan and South Africa. A five-step methodology was used, comprising: (i) understanding what sources of funding are in place; (ii) analysing the procedures and legal frameworks for using these sources; (iii) establishing a counterfactual – a best-guess estimation of what spending in 2020 would have looked like without the pandemic; (iv) expenditure analysis (comparing outturns against the counterfactual) alongside interviews with the government; and (iv) impact analysis, to quantify the returns foregone from diverted public spending.
The results reflect that to strengthen crisis response and improve budget credibility in the face of future pandemics or shocks, governments should rely less on ex-post sources of financing. They should consider developing a framework for budget reallocations that includes shifting budget reallocations from a rushed ex post instrument to a pre-planned ex ante instrument. Implementing such a framework would facilitate greater engagement with line ministries, greater scrutiny from parliament, and a more credible budget. A proactive approach to budget reallocations should be couched within a broader disaster risk financing strategy to ensure that the costs and benefits of such an approach are weighed against other available financing tools, such as risk transfer instruments and the cost-effective use of domestic public finance. Efforts should also be made to increase and improve access to financing for emergencies. This will help governments provide sufficient finance when it is needed, as limited financial capacity means that while budgeting and budget process improvements will help mitigate the impacts, they will not be able to provide all the required finance to respond to the most serious disasters. Access to additional financing will help to further mitigate the impacts of disasters and make responses timelier and more cost effective.
The case studies offer recommendations on how to lessen the opportunity costs associated with disaster-related budget reallocations and make public budgets more responsive and resilient to crises. Resilience budgeting is a novel budget formulation approach which specifies formalised criteria for reallocation and ex-ante agreement between line ministries and central finance agencies about their priorities. With such an approach, the decision-making process about budget cuts can become more transparent, cost-effective, and quicker, while simultaneously providing line ministries with more predictability on in-year budget changes.