Floods, Public Budgets and Fiscal Resilience: Evidence from Italian Municipalities

Hydrogeological disasters are an increasingly important source of fiscal stress for local governments, yet evidence on how municipal budgets adjust to these events remains limited. This paper estimates the fiscal effects of hydrogeological State of Emergency declarations on Italian municipal budgets over 2016–2022, exploiting their staggered timing across municipalities. We find that treated municipalities increase both total revenues and total expenditures after first exposure. The response is primarily investment-led, with capital expenditures accounting for the largest estimated component of the adjustment while current expenditures remain broadly unchanged. The largest changes in expenditure composition involve civil protection activities and sustainable development. On the revenue side, the adjustment is driven mainly by capital revenues and intergovernmental transfers. We further examine municipal heterogeneity using an ex-ante measure of fiscal resilience based on debt-service burden and tax autonomy. Municipalities with lower debt-service burden display sharper immediate fiscal adjustments, whereas tax autonomy matters more for sustaining the fiscal response over time. The weakest responses are observed among municipalities combining high debt-service burden with weak tax autonomy. Overall, the evidence suggests that hydrogeological emergencies trigger a structured, investment-led fiscal response, but that pre-existing fiscal conditions shape local governments’ capacity to absorb and manage these disaster-related fiscal pressures.