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  • BudgetingforDisasters

    MarvinPhaupandCharlotteKirschner

    TheGeorgeWashingtonUniversity

    30th AnnualMeetingoftheWorkingPartyofSeniorBudgetOfficials

    OECDConferenceCenter,Paris45June2009

    1

  • Outline

    I. Findings

    II. Disasters&TheirCosts

    III. PolicyResponses

    IV. ContributionofEffectiveBudgeting

    V. InternationalPractices&Experiences

    VI. TentativeConclusions

    2

  • 3

    I.Findings

    Governmentpoliciescanimprovewellbeinginfaceofdisasters Mostlybyeffectingchangebefore loss Butpotentiallyharmfulpoliciesexist

    Effectivebudgetingcanhelp Key:Exanterecognition offuturecosts

    Manycountrieshavepracticesconsistentwithexantebudgeting,butinsufficientinformationtoconfirmexanterecognitionofcosts

  • 4

    II.Disasters

    Natural&humancauses Lowfrequency,highconsequenceevents

    Emergencies,disasters&catastrophes Size&timinguncertain

    5yearplusevents

  • II.CostofDisasters

    Significantlossofresources&productivecapacity

    Threattolivingstandards&lifetimeconsumptionplans

    Lowfrequencyincreasescost Unlikelyeventoccursoften Expectedvalueofannualcostgreaterthanzero

    5

  • II.CostsofDisaster

    1995KobeEarthquake Propertydamagedestimated$100billion($1995)

    2005HurricaneKatrina AsofApril2006,Bushadministrationsought$105 billionforrepairs&reconstruction

    CostliestnaturaldisasterinUShistory December2004IndianOceanEarthquake&Tsunami $4.5billioninIndonesia

    6

  • Hurricane Katrina

    Kobe earthquake

    1975 1980 1985 1990 1995 2000 2005 2008Year

    EMDAT: The OFDA/CRED International Disaster Database www.emdat.be Universit Catholique de Louvain, Brussels Belgium

    II.EstimatedDamageCausedbyNaturalDisasters19752008

    7

  • 8

    III.PolicyObjectives

    Maintainpostdisasterlivingstandards Providereliefandpostrecoveryassistance Mitigation Increasenationalsaving&capitalformation

    Efficient&equitableallocationdecisions Useallavailableinformation Fairnesswithin&acrosscohorts

  • III.OurCriticalAssumptions Governmentshavelongtermdeficittargetbasedonintergenerationalequity,independentofexpectedcostsofdisasters

    Nootherbudgetprocessassumptions Exantebudgetingonlyaffectsnumbers&tradeoffs

    Consistentwithmanypractices: Insurance Contingencyfunds Ornoneofabove

  • III.BudgetaryAlternatives

    ExPost Focusonresponseafterevent

    ExAnte Focusondisasterthreatbeforeevent

    Ideallybothareused Dangerofthemiddleway

    Exantedisclosure

    10

  • III.ExPostPolicy

    Focusonrelief&recovery Authorizeemergencyassistanceprogramsincludingaidforreconstruction

    Deferdecisionsonexactamounts&typesofassistanceuntileventoccurs

    Someattentiontomitigation Rebuildingconvenient,efficientopportunity

    11

  • III.ExPostBudgeting

    Fewcoststorecognizeuntilresourceoutflow Emergencyplanning/training/stockpiles Newbenefitsatzerobudgetcost

    Nofiscalincentivetomitigateorsave Responsetobefinanced&budgetedafterevent Oftenwithsupplementalappropriationsthatrequirefewtradeoffs

    12

  • III.ExPostEconomicEffects

    Financingprovidedbyredistributiontovictimsfromothers

    Moralhazard Privatemitigation&precautionarysavingincentivesdecline

    Comparedwithnopolicy Totaleventlossesincrease;capitallower Largerdeclineinincome&consumption

    13

  • III.ExAntePolicy

    Focusondisasterplanningbeforeevent Precommittolimitsontypes&amountsofassistance Disciplinesresponse Clarifiespublicprivateroles

    Createpublic&privateincentivestomitigaterisks&tosave(offsetmoralhazard)

    14

  • III.ExAnteBudgeting

    Recognizethepresentvalueofgovernmentsexpectedcost,annualizedforbudgetperiod,beforetheeventoccurs

    Increasedbenefitshasbudgetcostnow Beforeloss,governmentconsumesless,savesmore

    Recognizesavingsfrompoliciesexpectedtoreducelosses

    15

  • III.ExAnteEconomicEffects

    Shiftsresourcesfromgoodtimesforwardtobadtimes;frombeforelosstoafter Reducelowvalueconsumption,increasehighvalue

    Moresaving,investmentinmitigation Comparedwithexpostbudgeting

    Fewertotallosses Morepostlosscapital Higherpostlossincome/consumption

    16

  • III.ExAnteAdvantages

    Lowerpostlosstaxes,fewerdistortions Smootherconsumption,higherwelfare Moreefficientchoices

    Public&private Reduceduncertaintyaboutpolicy

    Noneedtosacrificepostdisasterassistance

    17

  • III.ExAnteDisadvantages

    Highcostofsaving&mitigation Lowerconsumptionnow Disastermaynotoccur:benefitsuncertain

    Concernaboutpoliticalmisuseofprelossfunding

    Higheranalyticalrequirementsforestimatingcostthanwaitinguntillossoccurs

    Mayreducedonorcontributions

    18

  • 19

    IV.EffectiveExAnteBudgeting Keyfeature:recognitionofexpectedcost

    Recognitionmeansresourcesallocated; Notavailableforotheruses Somethingmustbegivenup

    Secondaryfeature:recognitionofcostpermitsrecognitionofsaving Creditsformitigation&otheractivities

    Riskbasedpricingofinsurance&deductibles Landuserestrictions Regulation

  • IV.DisclosureisNotBudgeting

    Disclosure,notrecognition,ofexpectedcostexanteisafavoredmiddleway Intragovernmentaltransfer Supplementarybudgetinformation Textnotesorprojections

    20

  • IV.EffectsofDisclosure

    Thebudgetshows Nopublicresourceuse Notradeoffsrequired Nocreditforsavings

    Fauxsaving PerhapsnoworsethanExPost Seemssubstantive:opaque Samebudgeteffectsasexpost

    21

  • 22

    IV.BudgetEffectofThreeExamplesExAnte Ex Post Disclosure

    Expenditures tooffbudgetbeforeloss

    100 0 0

    Revenues increase&spendingdecreasesbeforelosss

    100 0 0

    Change inpublicsavingbeforeloss

    100 0 0

    Expected postlosstaxes

    0 100 100

    Postloss income Higherthanalternatives

    Belowexante Belowexante

  • IV.ExAnteBudgeting&CloseSubstitutes

    Publicpurchaseofinsurance Mandateprivateinsurancepurchase Publicoffbudgetinsuranceorreinsurance Contingencyfunds Noteeffectsofeachon

    Mitigationincentives Politicalresistancetofairpremiums Saving Uncertainty

    23

  • V.InternationalPractices

    24

    NoRisk LowRisk MediumRisk

    HighRisk

    Earthquake 2 5 1 2

    HurricaneTyphoon

    2 3 2 3

    Tsunami 4 4 1 1

    VolcanicEruption 6 2 1 1

    WildFires 0 4 4 2

    Flood 0 0 5 5

    Blizzard 1 3 3 3

    10of27CountriesRespondedtoSurvey

  • V.GovernmentsRoleinDisasterRelief&Recovery

    9providecashgrantstoindividual&businesses;4provideloans

    8providecashgrantstolowerlevelsofgovernment;3provideloans

    6providetaxadvantagestodisastervictims 8provideemergencyservices 5stockpilereliefsupplies

    25

  • V.BudgetingforDisasterRelief&Recovery

    8budgetexpost 2budgetatexpectedactuarialcosts

    Unusedfundsareavailableforlaterrelief&recoveryusein1country(exante)

    Unusedfundsexpireorrevertbacktotreasuryin1country(disclosure/expost)

    All10countriesusesupplementalappropriationstofundrelief&recoverycostsinexcessofbudgetedamounts

    26

  • V.BudgetingforMitigationEachBudget

    CycleInCapitalBudget

    Lower LevelofGovernmentResponsible

    ActivityNotinBudget

    Research &Development

    9 1 4 0

    EarlyWarning 6 2 4 1

    RegulationEnforcement

    6 0 5 1

    LandConservation 7 2 4 0

    ResponseCommunicationsSystems

    7 2 4 0

    Training&Exercising 9 1 5 0

    27

  • V.GovernmentPoliciesforInsurance 5of10countriesinvolvedwithdisasterinsurance

    28

    France Japan Norway Switzerland Turkey

    Mandate privateinsurersprovidecoveragefornaturaldisasters

    No No Yes Yes No

    Mandatepurchaseofinsurance

    No No NoYes,insomecantons

    Yes,inmunicipalities

    Governmentprovidesinsurance

    Yes No Yes Yes Yes

    Governmentprovidesreinsuranceorguarantee

    Yes Yes No No No

  • V.InsurableHazards

    Eachof7hazardsinsurabletovaryingdegrees All5countriesinsureagainstearthquake Franceonlycountrywithallhazardsapproachtoinsurance

    Correlationbetweenperceptionofrisk&provisionofinsurance R=.37forallcountries R=.53afterremoving1countrythatinsuresforallhazards

    29

  • V.GovernmentInsuranceTendstoIgnoreMoralHazard

    Only2countriescaptheamountofcoveragebelow100%ofvalueofsomeatriskproperties,butnomandatorydeductibles

    Anotherhasmandatorydeductibles,butnocaps

    Other2countrieshavenocaps&nomandatorydeductibles

    Premiumsforinsuranceareadjustedforriskin2countries

    30

  • V.ContingencyFunds Contingenciesmorebroadlydefinedtoincludealldifficulttopredicteventsthatimposesubstantialcostsongovernments(terrorevents,war,economiccrisis,epidemics,etc.)

    Contingencyfundsusefulforincreasinggovernmentsavings,butprovideweakincentivesformitigationofspecifichazards

    4of10countriesreportuseofgeneralcontingencyfunds

  • V.ElementsofExAnteBudgeting

    Closerexaminationofthreecountriesthatappeartouseexantebudgetingforearthquakesandothernaturaldisaster Japan NewZealand Turkey

    32

  • V.Japan

    Highriskofearthquake&volcaniceruption Approximately5%ofnationalbudgetfordisasterrelief,recovery,&mitigation

    Residentialinsurancemaybepurchasedthroughprivateinsurersasanadditiontofireinsurance

    Riskadjustedpremiumssettocovercosts

    33

  • V.Japan:SharedResponsibilityofDisasterCosts

    PrivateinsurancecompaniespasspremiumsontoJapaneseEarthquakeReinsuranceCompany

    JERresponsibleforpayingclaimsupto110bil

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