Delegating tax-and-spend powers to local government risks limiting the ability of local authorities to respond to environmental disasters, according to new research published in the Journal of Economic Behavior and Organization.

Dr Jose Rowell Corpuz (University of Warwick), Professor Joseph Capuno (University of the Philippines Diliman) and Dr Samuel Lordemus (University of Lucerne) looked at 10 years of public finance data from the Philippines both before and after a national emergency in 2013, when Typhoon Haiyan struck the islands with 200mph winds, to explore how local public finances respond to natural disasters.

The researchers also looked for evidence of how central government disaster relief funds and international aid affected local revenue raising and spending on essential services – did the external aid compensate for lower local revenues, or was it genuinely additional to existing resources?

While these questions have been studied in better-off countries, it is believed that this study substantially adds to the analysis of the local fiscal response to natural disasters in a country with more limited financial resources.

The Philippines is in a high-risk typhoon area, and Typhoon Haiyan was one of the strongest ever recorded and caused unprecedented damage as it crossed the country. Official government sources estimate that about 6,300 people died, more than 28,000 were injured and 4 million left homeless.

It displaced communities and affected the regions' infrastructure, roads, hospitals, schools, and public services. The severity of the impact on the areas it ravaged was unanticipated and unprecedented, with its effects felt during and after the disaster.

Using data on local government revenue and spending from before and after Typhoon Haiyan, Dr Corpuz and his co-authors found:

• The typhoon had a small impact on local government revenue raising. In the short term there was a fall in income from taxes and charges on local businesses but these recovered after around two years. This effect was more severe in less-well-off municipalities and highlights the importance of flexible central government support to address economic inequality.
• The typhoon had a small but measurable impact on spending. Local governments spent slightly less on all areas of responsibility except health, housing and labour. They also reduced their debt repayments.
• Local governments which received external aid did not diminish their tax collection efforts and spent more on public services, education, social and economic services, and debt repayments. This result shows that foreign aid has a vital role to play in supporting local government to help citizens in the aftermath of disasters.

Commenting on his research Dr Corpuz said:

“The effects of natural disasters can have a huge impact on a local economy and under decentralisation, local governments are limited in the resources they can mobilise in the aftermath.

“Ordinarily, local tax revenue collection provides a higher rate of local government spending over and above central government transfers. This changes after a natural disaster when there are significant losses in revenues particularly from local businesses and economic enterprise.

“When a typhoon as powerful as Haiyan affects the generating revenue capacity of local governments, central government transfers and foreign aid are crucial to maintaining public expenditures that benefit its people.”

Specifically, the research evidence suggests:

• Local governments exposed to common nationwide shocks such as Typhoon Haiyan have limited capacity to reallocate or provide additional resources that would address the increased demand for local public spending.
• Lack of strong and responsive financial support from central government leaves local governments to fend for themselves. This situation only escalates the impact of external shocks.
• Central government needs to step in with additional sources of funding for disaster relief and ensure a coordinated effort with other funding sources (such as foreign aid) to effectively target the most vulnerable communities.

Dr Corpuz concludes:

“Although we cannot generalize, the Philippine case is a reminder of natural disasters’ debilitating effect on local governments and vulnerable communities. We hope that our study will inspire many in ensuring a well-coordinated disaster risk management by central and local governments, particularly in settings of decentralised local government finance.”

Read the full research paper: Natural disasters and local government finance: Evidence from Typhoon Haiyan