Floods, public budgets and fiscal resilience : evidence from Italian municipalities

We examine the impact of extreme hydrogeological events on local governments' fiscal responses in Italy between 2016 and 2022, with a focus on how local public finances contribute to disaster resilience. Leveraging the staggered timing of disaster declarations and employing a difference-in-differences framework, we estimate dynamic treatment effects on revenue and expenditure of municipal governments. Our findings indicate that local governments of affected municipalities significantly increase total and capital expenditures in the aftermath of disasters, particularly in functions related to emergency management, environmental protection and economic development. These spending increases are primarily financed through capital revenues and transfers from higher levels of government, with no corresponding rise in current expenditures. To explore heterogeneity in fiscal responses, we develop a fiscal resilience index combining measures of debt servicing costs and tax autonomy. We find that municipal governments with both low debt burden and high tax autonomy exhibit the strongest and most persistent post-disaster financial adjustments. In contrast, municipal governments with high debt service obligations and limited tax autonomy exhibit weaker responses, reflecting a constrained capacity to mobilize financial resources. These results underscore the critical importance of fiscal space, beyond formal fiscal autonomy, in shaping local governments' ability to respond to climate-related shocks. From a policy perspective, our findings highlight the need to strengthen institutional and financial mechanisms that enhance fiscal resilience and ensure timely access to recovery resources for municipal governments with limited capacity.