Federal budget underestimates natural disaster costs by $6bn, report finds
The federal budget fails to account for the real cost of natural disasters, leading to funding gaps, a new research paper has found.
A paper by the Centre for Policy Development (CPD) found that the government spends $1.6 billion a year on disaster recovery but only budgets for $215 million. This has created a funding gap of $6 billion over the forward estimates.
“Disasters are inevitable, not unpredictable. We know they’re coming, we just don’t know exactly when. That’s no different from other budget forecasts like unemployment or inflation,” Dr Guy Debelle, report co-author and former RBA deputy governor, said.
“This spending is going to occur either way — by not budgeting for disaster recovery, we underestimate the long-term cost and undervalue the benefits of preventing harm in the first place.”
By including accurate cost estimates in the budget, governments would improve their fiscal discipline, be better prepared to weather incoming climate shocks and have better incentives to invest in climate adaptation and resilience policies, the report said.
The paper recommended that the government incorporate future disaster costs into existing budget lines, such as the Disaster Recovery Funding Arrangements. Alternatively, it could create a new budget line to account for estimated spending on future disasters.
The authors slammed Treasury’s claim that natural disasters are too unpredictable to include in the forward estimates, saying it was “not just unrealistic, it’s fiscally misleading.”
While the precise cost of individual future disasters would be difficult to estimate, the aggregate costs of disasters over time are predictable, the CPD pointed out.
“In fact, it’s no more difficult to estimate than other key variables already used in budget forecasting such as unemployment or inflation,” the centre said.
Toby Phillips, economic director at the CPD and report co-author, added: “Insurers already use these kinds of estimates to set premiums and manage risk — and they also factor in how resilience investments reduce long-term costs. If a global financial industry can solve this problem, then so can our government.
“If your roof is nailed down properly or your house is elevated above flood levels, your insurance is cheaper. The same logic should apply to public spending.”
Including future disaster costs in the budget would give adaptation and mitigation policies a fairer hearing in Cabinet discussions, the report added.
“Right now, those policies show up as upfront costs, while the benefits — reduced disaster recovery spending — are invisible in the budget process,” the report reads.
“Currently there’s no incentive for governments to invest in disaster mitigation; if anything, there’s a disincentive. Recognising the true cost of inaction would strengthen the case for preventative investment in adaptation and resilience.”
