In the context of increasing incidence and cost of climate-related disasters, budgetary processes need to be upgraded to reflect their macrofiscal risks.
At present, disaster risk financing (DRF) is mostly ad hoc, and fiscal impacts of climate change are only considered in a limited manner in national budgets across EU Member States. While financing strategies reflect national choices, these need to be evidence-based; thus, structured data collection on macrofinancial risks and fiscal impacts is essential.
Key Messages
- The European Commission has developed a stepped approach to DRF to support Member States in understanding, planning, and managing the fiscal impacts of disasters. This approach is structured around four pillars, with their stages of development detailed: (1) assessing the fiscal impact of disasters; (2) private sector risk ownership; (3) public sector disaster risk management; (4) institutional arrangements.
- Explicitly addressing fiscal impacts of climate change in budgetary processes, including from climate-related disasters, would be beneficial. It would avoid the need to find funds post-disaster without having budgeted for them and would help to proactively manage risks to debt sustainability from extreme weather and climate events. By embedding climate risks into fiscal planning, governments can adopt more proactive, risk-informed budgeting practices, align fiscal strategies with climate goals, and enhance public financial management.
- The reformed EU economic governance framework introduces requirements to assess and report on the macrofiscal risks from climate change, disaster- and climate-related contingent liabilities, and the fiscal costs incurred due to disasters and climate-related shocks. The requirement for Member States to report these risks “to the extent possible” acknowledges the current lack of a single or common methodology, differences in data availability, and variations in country-specific contexts.
- A structured stock-take of each EU Member State’s current approach to DRF (including data collection) using the framework in Radu (2024) would help countries determine the state of their approach to DRF and how and where to improve. Granular and accurate information is especially important for evidence-based strategies, regardless of the political priorities these strategies seek to advance, and Ministries of Finance are well-placed to support this.
Keywords
budgetary processesdata challengesdisaster riskfiscal impactsphysical risk