Politics over economics

In this part of the world no bet is certain and unforeseen events could yet change the fate of the fourth Netanyahu government which hangs on the narrowest of majorities.

Moshe Kahlon  (photo credit: EMIL SALMAN/POOL)
Moshe Kahlon
(photo credit: EMIL SALMAN/POOL)
‘A two-year budget is not an ideology,” Finance Minister Moshe Kahlon said in March at a briefing marking the completion of his first year in the job, “and I will try to convince the prime minister that a two-year budget is not an insurance certificate for the government. A one-year budget doesn’t mean the government won’t last, and a twoyear budget doesn’t mean it will.”
Fast forward two months, this week, Kahlon and Prime Minister Benjamin Netanyahu struck a deal clearing the way for the country to return to a two-year budget for the first time since the 2011-2012 budget, which ended with a deficit of NIS 40 billion, over double the target set by then-finance minister Yuval Steinitz.
The deal gave way to suggestions that political interests are trumping economic sense.
“It is clear that the two year budget is intended to provide a political solution, not an economic one,” Israel Democracy Institute President Yohanan Plesner tells me.
Economists are largely against the two-year budget on the grounds that it does not provide the flexibility required to act in conditions of uncertainty and that it is not possible to make such long-term macroeconomic projections both domestically and globally.
Another argument is that the budget cycle is a key forum for debate on economic policy and that lowering the budget frequency may compromise the democratic process.
Its proponents note that thanks to Israel’s fragile coalition politics, an annual budget debate is also an annual shakedown where each party in the coalition exerts pressure to get a bigger share of the pie for its constituents.
“When you have a two year budget the ‘transition fees’ are cheaper,” Prof. Ben-Zion Zilberfarb, a former treasury director- general, says.
Zilberfarb also dismisses the uncertainty and macroeconomic forecast arguments saying that uncertainty is a permanent fixture and annual budgets have also been known to be off course.
Another positive he sees is the ability to engage in long-term planning.
Plesner counters that while political instability is a serious problem with economic ramifications the way to deal with it is by political reform, not by artificial solutions such as a two-year budget.
Kahlon, to be fair, was bound by a coalition agreement to pass the two-year deal and while he did manage to gain some concessions, including a provision that gives a “way station” one year into the deal that will allow the treasury to alter taxation rates should tax collection fall short of forecasts, would have liked to gain more.
However just over a year into office, Kahlon’s position is weak.
He has so far failed to deliver on promised cuts to the cost of living and to emulate the mobile phone price revolution he engineered as minister of communications while still with the Likud, and has seen his party slump in the polls. He has no interest at present in any move that could trigger early elections – a crucial difference between the twoyear and one-year budgets is that should alterations at the “way station” not pass, it will not trigger automatic elections as is the case when a government fails to pass a one-year budget.
Hoping that with time on his side he will be able to see through reforms, Kahlon wants to see Isaac Herzog’s Labor Party enter the government. Getting rid of the budget obstacle could help smooth the path for their entry.
But as Kahlon himself noted, in this part of the world no bet is certain and unforeseen events could yet change the fate of the fourth Netanyahu government which hangs on the narrowest of majorities.