Senior Ministry of Finance officials are preparing to comply with the emerging decision in favor of a two-year budget, despite objections by professional staff. Even budget director Amir Levy, who publicly announced his opposition in principle to a two-year budget, is not expected to attempt to stave off the measure, and will certainly not resign, as proposed by a number of politicians. Knesset Economic Affairs Committee chairman MK Eitan Cabel (Zionist Union) today added his voice to calls to oppose such a budget by Yesh Atid chairman MK Yair Lapid, telling Minister of Finance Moshe Kahlon to refuse the demand by Prime Minister Benjamin Netanyahu.
Kahlon himself has said on a number of occasions that a two-year budget is no guarantee of political stability, but he nonetheless has no desire for a confrontation with Netanyahu. Political sources said that Kahlon's supreme interest is in waiting until the measures he initiated in the housing market and the banking system have an effect, so that he can has achievements he can present to the voters. As of now, results in both of these areas are still far from being achieved.
The Ministry of Finance leadership has not yet convened to discuss the management of a two-year budget, because the political echelon has not yet made such a decision, but the emerging idea among the leadership is to demand the introduction of budget balancing mechanisms to be put into operation towards 2018 in order to prevent the creation of substantial deviations from the budget policy targets, as occurred in the 2012 budget.
The Ministry of Finance admits that its professional staff has no doubt that the government's forecasting ability for a two-year budget is much poorer, which will expose the country to greater risk in meeting the 2018 budget targets. Most of the problem is on the revenues side, because the state's ability to project its revenues, which depend on the state of the economy and the global economy, is limited.
The Ministry of Finance's greatest concern is about a hole in the budget similar to the one created in the 2012 budget, which caused a budget deficit double the one planned, and threated to undo the achievements of budgetary policy in reducing the ratio of debt to GDP, which could have caused a downgrade in Israel's credit rating. The 2012 budget deficit crisis was eventually solved by extreme across-the-board budget cuts and tax hikes.
As a result of the 2012 trauma, the Ministry of Finance is considering setting a control and balance point in September or August 2017, at which automatic balancing mechanisms will be activated if it becomes clear that a deviation from the budget targets and the downtrend in the budget deficit has developed. If a two-year budget is adopted, the Ministry of Finance leaders are therefor expected to discuss the introduction of balancing mechanisms into the budget bill - to be approved in advance as part of the approval of the two-year budget. The idea is devise a set of measures from which the Ministry of Finance can select ways of balancing the budget. On the spending side, these measures include an across-the-board cut, transferring spending from one year to another, and introducing changes in the budgets of specific ministries. On the revenues side, the proposed measures include tax hikes and more thorough tax collection. Most of these measures do not require Knesset approval; the Minister of Finance is authorized to implement them during the budget year.
A bad idea at a bad time
While the economic leadership in Jerusalem, headed by the Governor of the Bank of Israel, is avoiding taking a stance, the two-year budget initiative is drawing withering criticism from senior economists outside the government sector. "This is a bad idea at a bad time," says former Bank of Israel Research Department head and Herzliya Interdisciplinary Center Arison School of Business Prof. Rafi Melnick.
Melnick lists three reasons for his opinion. "First of all, no serious economist anywhere in the world supports a two-year budget. Secondly, our experience, which may have been forgotten, shows that as soon as you start using budgetary policy for political needs, it is a sure formula for a future crisis. The most prominent example is of course the behavior of the Begin-Aridor (late Prime Minister Menachem Begin and former Minister of Finance Yoram Aridor, A.B.) government in the 1980s, with measures like tax cuts that eventually caused hyperinflation."
"Globes": What is the third reason?
Melnick: "What is currently prevailing in the world and as a result in Israel also, is a state of extreme uncertainty. This great limits our ability to predict what will happen to GDP, and consequently to tax revenues and the budget deficit - the basic tool of monetary policy, and I'm not even mentioning the exchange rate and inflation.
"In the era in which we live, the most rare commodity is flexibility to respond to unexpected developments in real time, without procedures involving the Knesset and legislative changes, and without cabinet discussions. We need this flexibility, because without it, we could find ourselves in a national disaster."
What are you referring to?
"A crisis in China, a further downturn in Europe, the euro bloc crisis, the beginning of a process of interest rate hikes in the US after a decade of a zero interest rate - a process that is expected to cause a profound upheaval in global financial portfolios."
But how is this related to the state budget?
"It's closely related, because monetary measures have been exhausted. We're in a zero interest rate environment. The effect of a further interest rate cut is extremely limited and very negative. The central bank will therefore be unable to respond with the necessary force to a negative development, and the role of fiscal policy is becoming much more central than under ordinary conditions. We don't have to reinvent the wheel. Furthermore, keep in mind that it's also possible to deal with issues requiring a long-term perspective, such as was recently done with the defense budget, in the framework of a one-year budget. In my opinion, the same solution can also be used in infrastructure."
Published by Globes [online], Israel business news - www.globes-online.com - on May 3, 2016
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