Economists question viability of two-year budget

Some say economy already struggling to cope with a deepening crisis and a high degree of uncertainty.

Yuval Steinitz 88 248 (photo credit: Ariel Jerozolimski)
Yuval Steinitz 88 248
(photo credit: Ariel Jerozolimski)
Economists are divided over the benefits of the two-year budget structure approved by the Knesset on Tuesday, as the economy is struggling to cope with a deepening crisis and a high degree of uncertainty. "In an effort to secure industrial and political quiet, the government is selling the public coffers of 2010. It needs to be remembered that 2009 is a difficult and extraordinary year in light of the global economic crisis. But 2010 could turn out to be different, and it is in this sense that the government is making a mistake by planning too far ahead with too little data," Dr. Roby Nathanson, head of the Macro Center for Political Economics, said on Tuesday. "The move to a two-year budget structure is doing harm to democratic principles. The budget is the vehicle through which the Knesset gives its approval to economic and general policy-making of the goverment and therefore it needs to be passed once a year," Nathanson said. On Tuesday morning, the Knesset approved Finance Minister Yuval Steinitz's temporary bill to pass the state budget every two years, instead of annually as is determined by law. The bill also extends the deadline for passing the two-year budget for 2009-2010 from 45 days to 106 days from the formation of the new government, which means that it will be presented for Knesset approval in July. The Knesset will eventually have to decide whether to change the 2011 state budget process. Similarly, Shlomo Maoz, chief economist at Excellence Nessuah Investment House in Tel Aviv, raised concerns over the economic viability and reasoning behind the switch to a two-year budget structure. "It is an outrage which reduces the importance of the Knesset," Moaz said. "From an economic point of view it is important to be able to react and adapt fast to changes in the state of the economy. In particular at a time of an economic crisis overshadowed by a high degree of uncertainty, it makes more sense to approve the budget structure on an annual basis." Maoz said the postponement of the deadline for the presentation of the budget meant that the economy and the unemployed will now have to wait even longer for the government to present solutions and to deal with the crisis. "There is no public debate over the budget. Since the outbreak of the crisis, the government has not reacted," he said. "The government needs to be able to act now, not in September." Maoz attributed the two-year budget structure proposal to the inability of the new government to meet the coalition demands promised by Prime Minister Binyamin Netanyahu. "The government is facing a big deficit and will not be able to meet coalition demands this year," he said. "They will need to be postponed to 2010. However, next year the crisis is expected to deepen and it is not clear whether the demands will be able to be met. It's like a double-edged sword." Others disagreed. "This switch to a two-year budget for 2009-2010 is only a temporary move in an extraordinary situation, but it is not an extraordinary move. It gives the government the opportunity to plan for a longer period, which is good," said Ori Greenfeld, macroeconomic analyst at Clal Finance Batucha. "We are already months into 2009 and by the time the two-year budget is presented in July we are talking about a structure for 18 months. In this sense, the 2009 budget is being added as part of the 2010 budget." Greenfeld said that the government was not expected to institute any big tax cuts or changes to fiscal policy as part of the 2009 budget, in view of a huge deficit of an estimated 6 percent of gross domestic product and a continued plunge in tax revenues. "It is better to live with a large deficit for one year rather than to roll over big deficits for a number of years which in turn would further increase the country's high debt-to-GDP ratio and negatively affect interest rates and the ability of the government to raise money," said Greenfeld. Greenfeld added that the biggest challenge of the government in 2010 was to boost engines of growth to accelerate the economy while finding ways to cover a growing deficit.