The Effects of Climate Change Impacts on Public Budgets and Implications of Fiscal Counterbalancing Instruments

Climate change impacts have manifold effects on public budgets. In this paper, we therefore use a computable general equilibrium framework to consistently analyze how both the expenditure and revenue side of public budgets are affected via climate change impacts in ten different impact fields in Austria by mid-century. We then investigate different options how reductions in public service provision can be counterbalanced by fiscal instruments or by foreign lending and the associated economy-wide effects. We find that without counterbalancing, climate change impacts on the government budgets are doubled when considering not only the direct effect on the expenditure side but also macroeconomic feedback effects which reduce the overall tax base. With counterbalancing, we find significant differences in budgetary and macroeconomic consequences across fiscal instruments. While an increase of the capital tax as well as a cut in transfers reduce the welfare losses of climate change, higher labor taxes amplify welfare losses. This is because higher labor taxes dis-incentivize employing labor, thereby increasing unemployment and unemployment payments by the government. A higher output tax also increases welfare losses, but less strongly than an increased labor tax. Finally, increased foreign lending reduces welfare losses twice as much as the cut in transfers or the increased capital tax in the short term, but leads to a higher deficit and government debt.