Backroom budget deals

In the absence of a real debate on the two-year budget, The Jerusalem Report looks at the pros and cons.

BENJAMIN NETANYAHU and finance minister Moshe Kahlon. (photo credit: REUTERS/BAZ RATNER)
BENJAMIN NETANYAHU and finance minister Moshe Kahlon.
(photo credit: REUTERS/BAZ RATNER)
IN THE lore of politics, crucial deals are cut in smoke-filled backrooms by power brokers, far from the prying eyes of the public.
In Israel, there are such deals. But more often than not, they are crafted in the elegant offices of the prime minister around a polished oval table where smoking is banned.
In place of the smoke, there is fog – opacity about what precisely was decided and why.
Take, for instance, the deal cut May 8 between Prime Minister Benjamin Netanyahu and Finance Minister Moshe Kahlon. In last year’s national elections, Kahlon’s Kulanu party got 7.5 percent of the popular vote, won 10 seats in the Knesset out of 120, and joined the fragile 61-member coalition.
Kahlon’s electoral platform promised widespread economic reforms. The main instrument for such economic reform is the annual government budget. However, Netanyahu has insisted that the next government budget should be for two years, 2017- 18, rather than just one year, 2017.
His major reason? Political ‒ avoiding the fractious annual budget process that could destabilize his razor-thin Knesset majority.
Do it once and be done for two whole years.
Survival has always been Netanyahu’s primary goal. The Knesset, a democratically elected parliament, is a major annoyance.
In the past, Kahlon has strongly opposed a two-year budget. In the May 8 meeting, attended by Bank of Israel Governor Karnit Flug, a compromise was reached; Netanyahu got his two-year budget and Kahlon got concessions enabling him to make major changes in spending and taxes if needed later in 2017. Flug went along with it, with reservations.
This is an issue of crucial importance to us all. How the government spends well over 400 billion shekels (about $100b.) of our money affects everyone. Ideally, we should have had a rip-roaring Knesset debate on whether or not to have a one-year or a twoyear government budget. Experts could have presented position papers, the media could chime in and the public, too, could have joined the fray through opinion polls.
This is how democracy should work.
Instead, we got a politically motivated decision with little public involvement – a backroom deal.
Is a two-year budget good for the people of Israel? Bad? Both good and bad? In the absence of a real public discussion, let us hold the debate right here, in the pages of The Jerusalem Report. Let’s hear the pros and cons from all sides and let our readers decide.
Why a two-year budget is a bad idea: Do Kahlon and Netanyahu have eyes in their heads? Do they see what is going on in Israel and the world? In April, Israel’s goods exports were the lowest for that month in seven years. There was a 22 percent annual decline in exports during the three months of February to April, compared to last year.
Why? Because Israel’s major markets – US, China, Europe, Japan – are all weak.
According to the Ifo Institute based in Munich, its world economic climate index has been falling for two years, and the “expectations” index (for future growth) has fallen even more.
So far, high consumer spending has propped up Israel’s economy. But the Bank of Israel’s monetary committee doubts this can continue for long – a weak economy sooner or later causes consumers to cut back.
With so much uncertainty in the local and world economies, does the government really want to lock itself into a two-year budget until the end of 2018. Remember the ’60s Broadway musical, “On a Clear Day You Can See Forever,” about a woman with ESP (extrasensory perception)? Neither Kahlon nor Netanyahu have ESP – and we have not had a clear day in the world economy for more than a decade.
If the main motive is to ensure the coalition’s survival, then the enlargement of the coalition to 66 MKs, instead of the razor-thin 61 that caused the prime minister sleepless nights, makes the two-year budget superfluous.
No other country has a two-year government budget. Either Israel is much smarter than the rest of the world, or a whole lot dumber.
The two-year budget idea was born out of sheer pragmatic necessity. On February 10, 2009, Israel held national elections after prime minister Ehud Olmert resigned. Netanyahu cobbled together a coalition government. Rather than shape a new oneyear budget for 2009 and, a month later, do a new budget for 2010, it was decided, logically, to do an 18-month (not two-year) budget.
That made sense. But things now are totally different.
What do the real experts, those who build the budget in the Finance Ministry’s Budget Division, think? They are opposed. Why? Budget Division head Amir Levy and his deputy Yael Mevorach, along with the Accountant- General Michal Abadi-Boiangiu, all are opposed to a two-year budget, even though it would save them a lot of work, in large part because it is so hard to accurately forecast tax revenues for one year, let alone for two.
Add to that the strange case of the “numerator.”
This is a clause enacted into law that prevents the government from assuming liabilities not paid for by revenues.
It was this clause, for instance, that kept the government from fulfilling its promise to bring to Israel the remaining Ethiopian Jews, for a relative pittance, because no revenue source was specified to pay for it.
What if Israel sinks into recession in late 2017 and tax revenues slump? The “numerator” (which stands for “enumerate revenues for every shekel spent”) and the two-year budget will, together, forestall any stimulating fiscal policy.
Here is another practical problem.
Legally, government ministries cannot carry over authorized budget spending from one year to the next. If you don’t spend it in 2017, you don’t get it back in 2018. And many ministries simply do not spend all the funds allocated to them, for many reasons, including incompetent management.
As a result, many worthy social projects will go down the drain. Or, last-minute firesale spending by ministries at the end of the year will waste billions.
Hebrew University Prof. Avi Ben-Bassat, Finance Ministry director general in 1999-2001, notes that the Defense Ministry, whose budget is by far the biggest, has a 10- year budget plan set in stone. That means, if spending cuts are needed, they always fall on the civilian-spending budget.
A two-year budget not only delays needed budget cuts, it concentrates them disastrously on social spending. Ask former finance minister Yair Lapid, whose 2013-14 austerity budget badly hurt his constituencies, lower to middle-income groups, exacting a price from his Yesh Atid party in the 2015 elections.
The annual budget debate is an ideal setting for a visceral discussion of deep-seated social and economic issues, such as child poverty, elderly poverty, tycoon influence, natural-resource (i.e. gas) policy, guns or butter, shortage of engineers in hi-tech, sagging high school rankings in math and science, and so on. We need that discussion badly, every single year, not every two years.
Why a two-year budget is a good idea: Incessantly, economists berate the government for its myopia – short-term thinking.
But, for once, when the government tries to think ahead long-term, for two years instead of one, and set longer-range priorities, the economists say, nay. Why? Bank of Israel Governor Flug believes a two-year budget could spur the government to think long-term and invest in infrastructure and human capital, to restore the economy’s growth drivers.
None of the arguments about how a twoyear budget constrains flexibility hold water.
Apparently, Kahlon has won Netanyahu’s agreement to give him wide powers, including legislation to create a “bank of just-in-case programs” that do not each need Knesset approval.
Note Kahlon’s political sagacity. A twoyear budget limits the Finance Minister’s degrees of freedom in 2018, the second year, precisely when elections may be in the offing. Kahlon’s just-in-case bank will give him vital political ammunition.
In 2012, an unanticipated budget deficit arose, as tax revenues fell short of predictions, and it was not addressed in a timely fashion. That was why then-finance minister Lapid was forced against his will to do an austerity budget. Kahlon has put in place a mechanism that would prevent a recurrence.
It is simply not true that other countries lack two-year budgets. Bahrain has it. Hungary tried it. Holland had a version.
But these pale compared to the US example.
Last October, the US Congress approved a two-year budget agreement (Bipartisan Budget Act) that avoided a federal government shutdown and took spending controversies out of the divisive 2016 presidential-election campaign.
The deal suspended the debt ceiling until March 2017, when the new administration takes office.
It is well known that Israel’s Finance Ministry has, in the past, consulted closely with American experts on embryonic budget plans. US experts have often chided Israel for its lack of long-range strategic planning.
Now, when efforts are made to think longer-term, why should thinking people object? I, myself, favor a one-year budget simply because in the uncertain and unstable Middle East, it is crucial to do a fiscal “restart” yearly, as events within Israel and beyond it frequently require.
Sorry, Netanyahu, that you may have to undergo the pesky annoying annual Knesset 12th-hour budget debates long into the night. It is called democracy.
And I disagree with Winston Churchill.
Democracy is not the worst system, except for all the others, but actually, if you let it work, it is not a bad system at all. It’s a shame to emasculate it just for expediency.
The writer is senior research fellow at the S. Neaman Institute, Technion and blogs at