The Knesset Finance Committee authorized the next budget to be a two-year one and voted Monday to allow the government to push off its deadline to pass the budget by several months, to November 19.
The two-year plan is actually for 13 months because of its late date in passing. Prime Minister Benjamin Netanyahu preferred a budget that would span two full years and a month because budget debates can lead to coalitions falling apart but Finance Minister Moshe Kahlon was opposed.
The decision to limit the budget, as Kahlon wanted, may help Israel keep its fiscal house in order. In 2012, the deficit exploded to twice its target level, which critics attributed to the two-year budget.
When the 2011-2012 budget was approved in late 2010, the critics argued, they could not properly forecast revenues and expenditures two years out. Even now, the finance minister’s prediction of revenues for 2016 has a NIS 6 billion range.
The deficit targets themselves are in question, with the International Monetary Fund recently stating that Israel has a tendency to move the goal posts, regularly reworking its plans to reduce the national debt.
In the first half of 2015, the deficit was significantly smaller than in the same period last year, despite the fact that 2015 was operating on a monthto- month version of the 2014 budget. The difference in deficits, which fell from NIS 4.7b. last year to NIS 3.4 billion this year, is a result of lower expenditures, according to the Bank of Israel.
In June, the 12-month rolling deficit fell a tenth of a percentage point to 2.6% of GDP, close to the 2.5 percent target. But, by 2016, the deficit is set to drop to 2%, and then continue falling through the end of the decade.
As the Finance Ministry pointed out to the government in a Sunday briefing on the deficit, Israel’s debt position is far better than many advanced economies, largely due to the fact that it weathered the global financial crisis better.
In 2007, Israel’s debt stood at 73.9% of GDP, just a hair above the OECD average of 73.3%. By 2013, it had fallen to 67.6%, while the OECD average rose to a whopping 110.9%. A lower debt burden means Israel can borrow more cheaply and spend less of its annual budget on servicing debt.
But Israel’s economic growth has also tempered of late, falling from an average of 4.3% between 2004-2013 to around 3% in recent years, with projections for 2015 and 2016 at 3.1% and 3.3%, respectively. Slower growth means a slower reduction in the debt-to-GDP ratio.
Given that Israel spends less on social ministries (such as education, health and welfare) than its OECD peers, cutting back spending to hit deficit goals will be difficult.
Still, there will be some room for maneuvering; the Finance Ministry projects that tax revenues will grow from NIS 254.7b.
in 2014 to NIS 265.4b. in 2015 and NIS 276.3b in 2016. The Bank of Israel, however, has warned that spending is slated to increase at a much higher rate, and billions of shekels will need to be pared back to hit the country’s deficit goals.
The budget will go to a first reading on August 31 and second and third votes will end November 19, instead of early November as previously announced.
The procedural changes were approved by the Knesset Finance Committee and were later brought to a vote in the plenum that was still being debated at press time, but was expected to pass.
Knesset Finance Committee chairman Moshe Gafni (UTJ) explained at a meeting to authorize the procedure that the postponement was necessary because the finance minister has a lot of reforms planned and possibly budget cuts, all of which should be discussed in depth by the committee to make sure they are good for the market and the public.
In light of concerns expressed by committee members, Gafni demanded that Kahlon appear before the panel by February 2016 to report whether or not he plans to continue the practice of two-year budgets or move to annual ones.
“I don’t like [the two-year budget], but at the end of the day the prime minister and finance minister agreed to it and, anyway, almost all of 2015 will pass without a budget,” Gafni pointed out.
The opposition submitted nearly 60 hours of objections to the bill to be discussed in the plenum, taking the opportunity to criticize the government’s economic policies.
“If the prime minister and finance minister were motivated by the good of the public and the market and not from political considerations, they would have passed a 2015 budget as quickly as possible and the budgets for the next year would be passed in an organized way, according to law, so there can be a real public discourse on the government’s priorities,” said Meretz chairwoman Zehava Gal-On.
MK Manuel Trajtenberg (Zionist Union), an economist by profession, said that, for the first time, an entire year went by without the state having a budget, and that, since 2009, Israel has de facto only passed a budget every other year. He added that Bahrain is the only other country that intentionally had a two-year budget and that, in other countries, while there sometimes is no budget for a few months it is considered an embarrassment for the government.
“If a CEO was working without a budget, he would be fired,” Trajtenberg said.