A two-year budget for Israel in 2017-2018 was finally agreed in a second meeting in Jerusalem between Prime Minister Benjamin Netanyahu and Minister of Finance Moshe Kahlon. Kahlon, who initially objected to a two-year budget, accepted after he was promised that the 2018 budget could be changed in November 2017, leaving the steering wheel of Israeli economic policy in his hands. The Governor of the Bank of Israel reiterated her position at the meeting that she did not oppose a two-year budget, provided that measures were taken to ensure its durability in the face of unexpected events.
Today's meeting was a follow-up to the meeting between Netanyahu and Kahlon last Thursday, at which it was agreed that the opinions of the senior professional echelon in the Ministry of Finance and the Bank of Israel should be heard before a final decision was made.
Besides Netanyahu, Prime Minister's Office director general Eli Gruner, Kahlon, and Ministry of Finance director general Shai Babad, the meeting, which took place in Netanyahu's room in the Prime Minister's Office, also included Governor of the Bank of Israel Karnit Flug, Bank of Israel Macroeconomics and Policy Division head Adi Brender, and Ministry of Finance budget director Amir Levy, deputy budget director for macroeconomics Yael Mevorach, Accountant General Michal Abadi-Boiangiu, and chief economist Yoel Naveh.
Representatives of the budget department reiterated their opposition to a two-year budget, due to the difficulty in predicting revenue a year in advance. Levy and Mevorach also argued that the government's ability to make spending decisions will be even more limited than in the past, due to the use of the numerator - a restraining mechanism, which on the one hand prevents the government from assuming uncovered liabilities, while on the other hand reduces flexibility in budgetary decision-making when there is an urgent need, for example a security or economic crisis.
It was agreed at the meeting to establish an assessment and control mechanism at the end of 2017 that would facilitate changes in the event of a deviation from the revenue forecast. Definition of the mechanism's authority will be formulated in the coming days by joint Ministry of Finance-Prime Minister's Office work teams.
Kahlon has already made it clear that he would not oppose the decision, although he objected to it. He insisted, however, on retaining as much authority as possible in order to ensure flexibility in handling the budget during the first year. Among other things, this included a demand for legislative changes that would guarantee a collection of measures Kahlon can use without Knesset approval in order to prevent substantial deviations in state revenues and a larger-than-expected budget deficit, such as the deficit that arose in 2011-2012.
Demands reflecting expected compensation
Kahlon's insistence in this matter comes from the realization that a two-year budget very much limits the importance of the Minister of Finance's role in the policy system in the second budget year, because the budget and the Economic Arrangements bill are the key tools at the Ministry of Finance's disposal.
The collection of measures at Kahlon's disposal includes authority to raise taxes and take enforcement measures (which he already has), postponement of spending from one year to another, transferring budget from one ministry to another, and the authority to deviate from the spending ceiling (box). Assuming this is legally possible, the list of powers will be approved in advance by the Knesset, and Kahlon will be able to use it at his discretion if circumstances determined in advance make it necessary.
At this stage, no increase in the budget reserve, as demanded by Flug for dealing with sharp fluctuations, is involved. Kahlon is in no hurry to increase the reserve, which has been NIS 7 billion in recent years, because he realizes that it would require cuts in government spending, which is already relatively low at present. Sources inform "Globes" that state revenues in April, slated for publication soon, are in line with the collection targets, so the NIS 1.5 billion surplus in state revenues from the beginning of the year will be maintained.
The measures demanded by Kahlon will be used if there is a substantial deviation from projected state tax revenues, so that the creation of a large budget deficit can be prevented. A larger-than-planned budget deficit emerged in 2012, forcing the government to adopt unpopular measures, headed by tax increases, in order to prevent a downgrade in Israel's credit rating and to ensure that the fall in the debt-GDP ratio would continue.
Published by Globes [online], Israel business news - www.globes-online.com - on May 8, 2016
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