Cabinet approves 2-year budget, insulating government but risking economic damage

Many of the assumptions for the second year of a two-year budget could prove faulty; in 2012 this led to swift cuts and tax increases.

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July 17, 2016 16:44
2 minute read.
Netanyahu and Kahlon

Kulanu head Moshe Kahlon and Prime Minister Benjamin Netanyahu shake hands after signing the coalition agreement. (photo credit: PRIME MINISTER'S OFFICE)

 
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The cabinet on Sunday approved the reinstatement of a two-year budget system, which would make it harder to topple the government, but could make it more difficult to hit fiscal targets.

Prime Minister Benjamin Netanyahu said the law would ease government planning, giving ministries a longer-term view of what resources will be at their disposal as they plan their work.

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“Economic stability, control of expenditures, lowering taxes, reforms with competition – these are what the finance minister and I are working on along with the cabinet ministers, for the benefit of the Israeli economy and the citizens of Israel,” Netanyahu said at the start of the weekly cabinet meeting.

The bill still requires passage in the Knesset, which is expected by the end of the summer session in early August.

When Israel originally introduced a two-year budgetary time frame with the 2009-2010 budget, the concept received widespread praise for its ability to reduce uncertainty and encourage long-term planning.

In Israel, in particular, where failure to pass a budget on time (about a month before the fiscal year in question begins) leads to automatic elections, the twoyear budget removed a stumbling block for keeping the government intact.

In 2012, however, critics who raised flags about the fiscal dangers of a two-year budget were vindicated. It’s difficult enough to project economic circumstances a year out, they had argued, so many of the assumptions for the second year of a two-year budget could prove faulty. The deficit for 2012 came in at more than double the target laid out in the 2011-2012 budget, requiring swift cuts and sudden tax increases.

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The new law would require a reevaluation mechanism whereby adjustments would be mandated if the updated forecasts deviate significantly after the first year. It also would leave some room for political instability – in the event the Finance Minister does not take action, a new budget would have to be passed altogether for the second year, once again wrapping the fate of the coalition in its passage.

Though former finance minister Yair Lapid did away with the two-year budget when he came into office in 2013, Israel still has not passed a one-year budget since.

Failure to pass both the 2013 and 2015 budgets led to early elections in those years, which meant budgets for those years were only passed around the time the following year’s budgets were due, as well. As a result, the government approved joint budgets for both 2013-2014 and 2015-16.

Finance Minister Moshe Kahlon agreed that a one-year budget was preferable, but said he reluctantly signed off on the two-year budget, which was agreed upon as part of the coalition agreement.

Lapid’s party, Yesh Atid, called the turn back to a two-year budget a political decision that would cost Israel’s citizens.

“The Israeli government decided today to play Russian Roulette with the Israeli economy in favor of political survival,” said Yesh Atid MK Mickey Levy, who was Lapid’s deputy in the Finance Ministry.

Zionist Union MK Stav Shaffir, who has waged a crusade against opaque budgetary transfers in the Knesset Finance Committee, added that the two-year budget would reduce accountability in Israel’s finances.

“It is preferable for the government to simply admit that it has no ability to make serious decisions on how to invest in the social needs of Israel’s citizens and that it prefers to prioritize according to political and sectoral interests and whims,” she said.

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