The opportunity cost of covid-19 emergency expenditure reallocation

by Stephanie Allan, Dayna Connolly & Kiran Tariq

A small shop selling items made from grass, baskets, brooms etc. South Africa. Photo: Trevor Samson / World Bank

Over the course of the next year, Oxford Policy Management (OPM) will be working with the Centre for Disaster Protection to understand one of the most common forms of disaster response financing—expenditure reallocation. When disasters like covid-19 strike, cash-strapped governments are often forced to raid their existing budgets in order to finance emergency relief and recovery. Although expenditure reallocation is an important part of any government’s disaster response financing, there is very little data on its scale or cost. To fill this gap, we will be following the financing of the post-covid-19 response efforts of the governments of Pakistan and South Africa. We will also be conducting similar studies in Ethiopia (supported by the Foreign, Commonwealth & Development Office (FCDO)), and Albania (supported by the World Bank) allowing us to draw insights from different contexts.

While essential for saving lives and cushioning economies from the worst of the immediate impacts, expenditure reallocation requires cutting other important public expenditure, presenting an opportunity cost in terms of foregone or delayed returns.[1] These impacts are particularly pronounced in countries with limited fiscal space to adjust to the crises or those that do not have pre-arranged disaster risk financing instruments to help cushion the blow. In such contexts, high-severity, low-frequency disasters (like the current pandemic) can undermine hard-won development gains and progress on poverty.

The opportunity cost of public money being diverted from its original objective, and repurposed for emergency response and recovery, has been understudied. By scrutinising budgets and the associated decision-making processes, we are aiming to help countries better understand the costs associated with disasters and to help inform decision-making around how to finance future disasters.

In this work we will be unpacking the two governments’ reallocation decisions and reviewing original plans for the resources in order to understand the impact any cuts have had. We will be collecting and analysing data from both South Africa and Pakistan to answer the following questions:

• To what extent has public expenditure deviated from plan on account of covid-19? Which sectors and spending programmes have been the ‘winners’ and ‘losers’ of budget reallocations?

• What are the formal and informal processes governing budget reallocations, and how have these changed over the course of the pandemic?

• What has been the cost of delayed or postponed expenditure as a result of the pandemic?

How will we approach these questions?

Understanding the inner workings of government public finances is essential for this study. In both Pakistan and South Africa—at the national and subnational level—we are scrutinising a wealth of budget data (Sindh and Punjab in Pakistan and Mpumalanga and Gauteng in South Africa) to track how allocations have changed throughout the pandemic. We will be monitoring shifts in sector spending by following the flow of public resources between ministries, programmes and line items, compared to a counterfactual, based on original pre-covid plans. Discussions with public finance experts and government officials are allowing us to piece together decision-making processes, including within the institutions involved, and the criteria considered.

Once we have a picture of the scale of budget reallocations as a result of the pandemic, we will draw on government appraisal documents and international evidence on public investment rates of return in order to estimate the impact of reduced or delayed expenditure in terms of social and economic returns foregone.

The scope of our work: what are we including and why?

This study relates to one particular disaster, covid-19, for three reasons. Firstly, it is occurring now. This allows us to capture the type of information that can be difficult or impossible to access in retrospective studies of disaster situations. Accurately recording information on how decisions are made is often not at the forefront of officials’ minds during a crisis. Secondly, its severity. As a tail end risk, we expect the public expenditure impacts to be pronounced, and therefore more easily identifiable. Thirdly, covid’s reach is global. This enables a cross-country study where we can compare and contrast fiscal responses, building a stronger evidence base and set of lessons learnt.

While covid-19 is perhaps a more pronounced or unusual shock than the more traditional shocks experienced by countries like Pakistan and South Africa, the recommendations will have a broader relevance for governments in responding to disasters. Furthermore, the learning and approach can be applied to other more common disaster events like floods, earthquakes or drought in the future.  

Pakistan and South Africa are selected as primary case studies because they are amongst the more vulnerable economies by virtue of the profound fiscal challenges they faced before the onset of the pandemic, and their lack of pre-arranged disaster risk financing instruments.

Fiscal resilience in Pakistan: a battle on many fronts

The first two cases of covid-19 were registered in Pakistan on 26 February 2020, and there have been 312,263 cases and 6,479 deaths to date. he peak of daily new cases was reached on 14 June 2020, and Pakistan was able to effectively bend the curve soon after (Our World in Data, accessed 30 September 2020).

The Government of Pakistan has few built-in financial cushions to meet the expenditure needs of an appropriate covid-19 response; prior to the crisis, Pakistan’s fiscal deficit hit an all-time high of 9% of GDP (World Bank 2020). Combined with limited disaster risk financing mechanisms at its fingertips, Pakistan has had to resort to cutting costs elsewhere to create the much-needed fiscal space. The federal covid-19 relief package is estimated at 1.2% of GDP and is followed by additional relief and uplift efforts by provincial governments, which have few revenue sources of their own. Finding these savings with their existing budgets adds an additional complexity to Pakistan’s already profound fiscal challenge, requiring difficult decisions to be made at a time of extreme fiscal stress and uncertainty.

What are we hoping to achieve?

By closely tracking the spending decisions of ministries of finance, we are hoping to gain a better understanding of the true cost of responding to disasters through budget reallocations. If indeed we are underestimating these costs, it may well mean that governments are underinvesting in mitigation and prevention even more than we think.

Furthermore, by providing a better understanding of the relative costs and benefits of disaster risk financing mechanisms, governments will be in a better position to make more informed decisions about how to prepare financially for future emergencies. For example, if relying on traditional ex-post budget reallocations is revealed to be a much costlier strategy than previously thought, the case for pre-arranged financing mechanisms (such as reserve funds, insurance, or capital market instruments) becomes more compelling. Lastly, by improving the evidence base around budget reallocations, we hope to provide policy guidance that will leave governments better equipped to reconfigure spending plans in a way that minimises the unintended negative consequences.

[1] The loss of other alternatives when one alternative is chosen. In this context, used to mean the losses associated with cutting or postponing certain budgeted expenditures in order to raise funds for covid-19 preparedness, response or recovery.

World Bank, 2020. October Macro Poverty Outlook, link. Data refers to 2018/19