and practical challenges implied by raising taxes in a country where revenue mobilization is historically challenging (Small, 2016).

Government spending can be reallocated by decreasing either government investment or government consumption. Reducing government investment in order to finance adaptation or insurance is, however, a self-contradictory approach. The objective of adaptation and insurance is to avoid the loss of capital (or to rebuild it quickly) after a disaster. If the preparation for the disaster consists of accumulating less capital, the policy will not achieve a higher level of capital compared to the situation where the government takes no risk management measures at all. The government would only achieve an intertemporal shift of resources. Thus, the reduction of government consumption seems the only logical option in terms of reallocation of resources to finance adaptation or insurance. However, government consumption includes spending on education, public security, the military, the judiciary and other institutions as well as social security. It is thus not possible to reduce government consumption without a loss of welfare (to the extent that these items contribute to welfare) and GDP. Appendix D presents a possible approach to take into account the welfare loss of reduced government consumption – recognizing that there is no consensus on how to measure welfare (Fleurbaey, 2009).

Most of the simulations assume that risk management strategies will be financed by a reduction in government investment (50%) and a reduction in government consumption (50%) given that a government might be constrained by the political economy or budgetary rigidities to reduce government consumption to finance risk management strategies. However, simulations are also run under the assumption of risk management strategies exclusively financed by a reduction in government investment to assess the impact of a scenario in which the government is unable to reduce consumption.

# 4.4. The government use of disaster-related finance

A similar government choice needs to be made for the use of the payouts received from an insurance or contingency fund. Payouts enter the government accounts immediately after a disaster. The standard equations in MFMod, including those for government expenditure, are calibrated and estimated using historical data. If the payout were simply added as a government revenue, this estimated use of revenue would determine the use of payouts as well. This is not likely to be a realistic model for the use of disaster payouts.

In principle, it would be possible to estimate the government reaction in terms of expenditure categories empirically from post-disaster data. However, there is insufficient historical data on hurricanes to allow an estimation of the reaction function. For the purposes of the simulations conducted here, the estimated government behavior is overridden for the treatment of payouts and a specific model reaction to an insurance payout is specified. As modeled, post-disaster payout is assumed to be spent only on rebuilding destroyed infrastructure – consistent with the financing assumption.

Since a payout from an insurance or contingency fund is likely to exceed the reconstruction capacity of a country after a large disaster, the rebuilding is assumed to take five years to complete. Alternative spending rules were examined to test the sensitivity of results to this assumption.

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