Financial effects and fiscal costs of a natural disaster

While a natural disasters can shape a community’s imagination and memory for generations, their effect on the economy is more limited.

Natural disasters such as earthquakes, floods, massive fires etc. inflict serious damage. Studies show that in addition to losing people’s lives, the consequences are just as bad for the economy.

Depending on the experience in different countries, the negative impact on economic indicators mostly occurs in the short run, while in the long run these effects are transient and negligible for the economy and the state budget.

Most noticeable is the direct impact of the natural disasters that we saw with the aftermath of the 21 September 2019 and 26 November 2019 earthquake in Albania. This effect was seen in the damage to infrastructure, the capital of businesses and individuals, and the potential future threat to the exploitation of natural resources.

These potential impacts raise a series of questions about how to estimate the fiscal costs of natural disasters.

In special way we can ask:

– How is the disaster burden borne by the business and the budget?

– How are these expenses distributed in different budget years?

– How does the government help redistribute resources between disaster victims and other taxpayers not directly affected?

– How can we predict the budget’s financial exposure to future natural disasters and forecast the right budget for these shocks?

All of these questions are becoming increasingly important to policymakers and analysts alike.

According to some researchers’ estimates (Melecky and Raddatz 2011), natural disasters have increased government spending by an average of 15 percent and reduced tax revenues by about 10 percent over the five years following a disaster, leading to a significant increase in the deficit. general budget.

Meanwhile, in the case of the November 26th earthquake, the stock of public and private asset destruction is expected to affect a decline in the productivity of businesses in the affected areas, but even beyond those areas. This expectation is related to the fact that there is a loss of efficiency when businesses switch to alternative forms of production and service due to supply chain breakdowns and transportation services too.

Due to the damage to business inventory and temporary disruptions in production and service, inflationary trends may also emerge in the short run, as a result of reduced supply of goods and services and increased demand. These increased prices will focus on the major industries and services and goods around the disaster area. In fact, the level of productivity decline depends on the country’s relative economic and social development. While more developed countries experience a lower mortality rate and greater loss of capital stock compared to them, less developed countries (including Albania) face greater losses in business productivity, but also mortality rate.

Disasters can also present major shocks to government operations and state finances because these events are widely viewed as a public problem that requires government intervention. Costs incurred when the government has no time to waste other than providing emergency response, disaster relief and recovery assistance to affected communities, which in fact increase public spending and require budget modifications. The macroeconomic impact of disasters can affect the tax base and consequently budget revenues.

Disasters can have significant potential consequences for public finances, increasing spending and at the same time reducing budget revenues, potentially resulting in increased domestic or external borrowing, substantial changes in existing and planned medium-term investments. The earthquake that hit Albania at the end of 2019 seems to have imposed additional pressure on public finances, prompting the government to undertake changes to the draft 2020 budget, as well as temporarily reflecting tax mitigation measures.

While the effect of destroying existing public and private assets cannot be claimed to significantly affect GDP, the recovery effect can be hopeful for business and the economy. Thus, the replacement of movable and immovable assets is likely to affect GDP as direct investment spending increases. Moreover, private and public consumption is expected to increase. By using the expenditure-to-GDP approach, this means that there will be an increase in both public and private investment spending, increased consumption and government spending on goods and services in response to the earthquake recovery. This will further lead to positive economic growth that converges to the return of the economy to its pre-disaster positions and possibly to effects that may exceed pre-disaster levels.

At a time when destroyed assets will be replaced by new assets, which will normally be safer and more technologically advanced, productivity will rise above pre-disaster levels and natural disaster can act as a form of depreciation. accelerate and increase future economic growth potential of the country. But a secondary effect may be inflation due to the growing demand for construction industry services, where monetary and fiscal policies need to act in time to keep up with the tendencies for abuses and avoidance of arising fiscal obligations. from the awakening of construction and services that accompany this industry and related industries.

However, despite the resistance of the economy and the consumer, expansionary monetary and fiscal policies are important for their real and psychological contribution to the recovery process. Keeping interest rates steady or lower can boost public confidence, while additional government spending providing solidarity to those affected also boosts market offerings through asset rebuilding and consumer spending.