Innovative Budgeting Strategies to Mitigate Fiscal Risks of Climate-Driven Disasters

The World Bank’s 2024 report highlights the need for Disaster Risk-Based Budgeting (DRBB) to embed disaster risk into public financial management systems, ensuring proactive resilience against growing climate and disaster risks. By integrating risk considerations into budgeting, governments can mitigate fiscal vulnerabilities, enhance preparedness, and safeguard long-term economic stability.

The World Bank’s 2024 report authored by a team led by Tatiana Skalon and Richard Anthony Sutherland, highlights the pressing need to integrate disaster risk into public financial management (PFM) systems. With climate change increasing the frequency and severity of natural disasters, governments face escalating fiscal risks that disproportionately affect vulnerable economies. Traditionally, disasters have been treated as rare and unpredictable, leading to reactive fiscal measures that amplify inefficiencies and delays. This approach, coupled with low insurance coverage especially in developing markets where only 10% of losses are insured compared to the global average of 31% further compounds fiscal vulnerabilities. The authors emphasize the urgency of embedding disaster risk financing (DRF) solutions into regular government operations to achieve sustainable resilience.

A Framework for Proactive Disaster Budgeting

The report introduces Disaster Risk-Based Budgeting (DRBB) as a structured method to embed disaster risk considerations throughout the government budget cycle. DRBB seeks to enhance financial resilience by addressing risks at seven critical stages: strategic planning, budget preparation, approval, execution, monitoring, audit, and policy review. These stages enable governments to anticipate and quantify disaster-related liabilities, prioritize investments in risk reduction, and balance fiscal responsibilities between preparedness and immediate response. By integrating DRBB into routine financial planning, governments can ensure that disaster risk reduction strategies are sustainably funded and effectively implemented.

Several countries demonstrate the feasibility of DRBB. Ethiopia, for example, integrates disaster risk considerations into its development plans and has introduced budget tagging systems to track disaster-related expenditures. New Zealand has centralized its public asset insurance framework, pooling risks to achieve economies of scale and ensure strategic resilience. In the Philippines, program convergence budgeting incentivizes cross-sectoral collaboration, with funds earmarked for disaster risk management initiatives spanning multiple government agencies. These examples showcase how DRBB can be tailored to diverse governance contexts to mitigate disaster impacts and enhance resilience.

Addressing Barriers to Implementation

DRBB faces several political, financial, and institutional barriers despite its benefits. Governments often prioritize immediate sectoral needs, such as health and education, over uncertain future risks. Political incentives further skew attention toward visible disaster response measures, which yield quicker political gains than investments in preparedness and risk reduction. Designing and implementing DRF instruments, such as insurance and contingent credit, can be complex and resource-intensive, requiring specialized expertise that many governments lack. Institutional fragmentation also complicates coordination across multiple agencies involved in disaster risk management, further limiting the effectiveness of integrated approaches.

The report recommends adopting a whole-of-government approach led by central finance agencies to address these barriers. By anchoring disaster risk considerations in the national budget cycle, central finance agencies can ensure that resilience strategies are prioritized across sectors. Strengthening institutional capacities and fostering cross-sectoral collaboration are essential to overcome fragmentation and align disaster risk management efforts with broader fiscal goals.

Embedding Resilience into Public Financial Management

Pre-disaster preparation is a cornerstone of effective DRBB. Governments are urged to establish emergency procurement systems, real-time audit mechanisms, and protocols for risk-informed budget reallocations. These measures ensure timely and efficient disaster responses while maintaining accountability and transparency. Evidence-based decision-making is central to this approach, requiring comprehensive data collection on contingent liabilities, disaster expenditures, and resilience investments. Budget tagging systems, already implemented in countries like Ethiopia and the Philippines, offer valuable insights for policymakers and enhance the transparency of disaster-related spending.

The report emphasizes the importance of a learning environment that fosters continual improvement in DRBB practices. This includes leveraging tools such as disaster-focused public expenditure reviews, diagnostics, and real-time audits to inform policy and budgetary reforms. Legislative oversight also plays a crucial role, ensuring that governments remain accountable for disaster resilience investments and response efforts.

The Path Forward: Expanding the Scope of DRBB

To further enhance DRBB, the authors recommend exploring its application at subnational levels, where disasters often have localized impacts that require tailored responses. This includes addressing the relationship between national and subnational PFM systems and governance processes. Expanding DRBB to encompass broader public sector entities, including central banks and parastatals, could unlock new opportunities for financial resilience. Additionally, focusing on the design and sustainability of reserve funds, harmonizing budget tagging with other initiatives, and strengthening emergency budget approval processes would advance DRBB implementation.

The political economy of disaster finance emerges as a critical area for further study. Understanding the factors influencing political commitment to disaster risk reduction can inform the design of more effective DRBB interventions. This research should consider variations across disaster types and development contexts to ensure globally applicable insights.

Building Resilient Societies Through Proactive Planning

The report concludes that embedding disaster risk considerations into PFM systems through DRBB offers governments a sustainable pathway to mitigate fiscal vulnerabilities, protect populations, and promote long-term economic stability. By aligning financial systems with resilience priorities, DRBB supports global efforts to adapt to climate change and build resilient societies. The case studies and recommendations presented in the report highlight how proactive planning, coupled with cross-sectoral collaboration and evidence-based policymaking, can transform disaster risk management from an ad hoc response to a core function of public finance. This approach not only safeguards economies but also ensures that disaster resilience becomes an integral part of sustainable development strategies worldwide.