Fiscal storms: public spending and revenues in the aftermath of natural disasters

We estimate and quantify the fiscal consequences of natural disasters using quarterly fiscal data for a large panel of countries. In our estimations, we employ a panel vector autoregression framework that also controls for the business cycle. In developed countries, we find fiscal behavior in the aftermath of disasters that can best be characterized as counter-cyclical. In contrast, we find pro-cyclical decreased spending and increasing revenues in developing countries following large natural catastrophes. These pro-cyclical fiscal dynamics are likely to worsen the adverse consequences of natural disasters on middle- and low-income countries. We quantify these dynamics. The canton of Unterwald in Switzerland is frequently ravaged by storms and inundations, and is thereby exposed to extraordinary expences. Upon such occasions the people assemble, and every one is said to declare with the greatest frankness what he is worth in order to be taxed accordingly. (The Wealth of Nations by Adam Smith, book V, chapter II, p. 359).