Are disasters a risk to regional fiscal balance? Evidence from Indonesia

This study examines the effect of disasters on the fiscal balance, revenue, and expenditure of local governments. The researchers use panel data and fixed effects methods to estimate the degree to which disaster severity influences budgetary solvency at the district and provincial levels in Indonesia between 2010 and 2018. An archipelagic country, Indonesia is exposed to many natural hazards, including earthquakes, wildfires, tsunamis, flooding, and storm surges. The impacts of disasters resulting from unmitigated hazards, such as human fatalities, infrastructure damage, and welfare losses, tend to affect macroeconomic and fiscal conditions.

The study finds that for Indonesia, disasters are shown to strain fiscal balance at both the district and provincial levels. At the district and provincial levels, the damaged roads variable demonstrated robust negative effects on fiscal balance. This decline in fiscal balance is largely due to a decrease in local own-source revenue and increases in social assistance expenditure, unexpected expenditure, capital expenditure, and consumption expenditure. At the district level, the riskiest type of expenditure to be increased is consumption expenditure; at the provincial level, it is unexpected expenditure. The findings of this study should encourage local governments to develop financing mechanisms to stabilize their fiscal operations amid disasters.