Fiscal Consequences of Terrorism

This paper provides an empirical analysis of how the frequency and severity of terrorism affectgovernment revenue and expenditure during the period 1970-2013 using a panel dataset on153 countries. We find that terrorism has only a marginal negative effect on tax revenueperformance, after controlling for economic and institutional factors. This effect is also notrobust to alternative specifications and empirical strategies. On the other hand, we find strongevidence that terrorism is associated with an increase in military spending as a percent of GDP(and a share of total government expenditure). Our estimations reveal that this impact isgreater when terrorist attacks are frequent and result in a large number of fatalities. Empiricalfindings also support the view that public finances in developing and low-income countriesare more vulnerable to terrorism than those in countries that are richer and diversified