Trade-offs in times of crisis: assessing the impact of budget reallocation

Authors: Lydia Poole, Dulce Pedroso

When disasters strike, governments are often forced to raid their existing budgets and make difficult trade-offs to finance emergency relief and recovery.

Our new research, conducted with Oxford Policy Management, looks into the evidence on the cost and benefits of budget reallocations and tests a new methodology for quantifying their impact.

Few countries plan properly for the costs associated with disaster response. The covid-19 response offers a case study of expenditure reallocation, as governments around the world took money from planned programming and redirected it to deal with the impact of the pandemic. However, in the assessments of the cost of the pandemic – or other disasters, opportunity costs of foregone planned spending rarely make it to the equation. We do not know if governments are moving funding away from critical and well-performing programmes or diverting underused funds in the best way. Furthermore, citizens usually have limited information about budget reallocations and only after the fact.

The cost of redirecting funds in response to Covid-19

Governments worldwide sought to counteract the impact of the pandemic through additional public expenditure. Each of the countries studied – Albania, Ethiopia, Pakistan and South Africa – however, faced profound fiscal challenges before the onset of the pandemic and had little in the way of pre-arranged disaster risk financing instruments. Some were reluctant to further increase their debt burdens, and all four countries relied heavily on budget reallocations and supplementary budgets cutting back their planned expenditures elsewhere. The impacts of the pandemic had knock-on effects by shrinking government revenues. With limited scope to borrow, governments in some cases found themselves spending less than they had planned prior to the onset of covid-19, which compounded the economic impact of the crisis.

With limited alternative financing options, budget reallocations were an essential tool for financing the covid-19 response – but at what cost? While comparing the volume of reallocations across countries is problematic, given the different budget structures, the “cuts” in our case study countries amounted to between 3–7% of total annual expenditure. This is substantial. The opportunity cost of returns forgone from diverted funds was high: 0.5–2 % of GDP. The opportunity cost multiple for budget reallocations is estimated to be 1.2–1.6, meaning each dollar mobilised incurs an opportunity cost of between USD1.20 and USD1.60.

We need explicit frameworks and transparency during crises

The advantage of budget reallocation is that it is like a financial first responder, swiftly redirecting funds to where they are needed. In the absence of dedicated disaster funds, the reallocation approach was the quickest way for the four countries to respond to the covid-19 pandemic. Budget reallocations proved particularly useful for financing the immediate response in the early stages of the shock.

However, haste increases waste – and the risk of fraud and corruption. None of the governments in the study countries have explicit frameworks for approaching budget reallocations in crisis contexts. Despite the widespread practice, this is not globally unique: we could not identify any publicly available frameworks for reallocating budgets in the wake of emergencies. Therefore, one of the main takeaways from this exercise is the need for governments to develop a framework for reconfiguring budgets in the wake of a disaster. We also urge governments and development partners to increase transparency in budget (re)allocations. Finally, we need to expand and diversify risk financing instruments. If governments had a better understanding of the additional financing required during and after a disaster, they could tailor a range of financing instruments that are proportionate to the costs of disasters. Changing how we plan and pay for crises could limit the cost of budget reallocations and protect the most vulnerable and poor people so that even in the long run, the cure does not become costlier than the disease.

For the full cross-country synthesis report, please see here. The Ethiopia brief is available here and the South Africa brief can be found here.