Treasury, PMO agree two-year budget mechanism

Moshe Kahlon and Benjamin Netanyahu
Moshe Kahlon and Benjamin Netanyahu

If the deficit for the second year exceeds NIS 15 billion, the Knesset can choose to reject the budget and call for elections.

Agreement has beenreached by the director-generals of the Ministry of Finance and the Prime Minister’s Office on the mechanism for the two-year budget for 2017-2018, as per the prime minister’s demand. The mechanism, created to allaythe reservations of Minister of Finance Moshe Kahlon, provides the Knesset with the power to deny the approval of the second-year budget, thereby dissolvingthe parliament and leading to new elections. Ministry of Financeofficials said such a scenario was extremely unlikely.

The agreed-upon mechanism is one of the lessons drawn from the missteps of the only two-yearbudget fully implemented until now in the years 2011-2012 as well as a numerator and the decision to leave a NIS 3.5 billion reserve for adjustments for the second budget year.

The agreement will be anchored in a special bill which will be distributed in the coming days ahead of accelerated legislation procedures. The mechanism essentially removes the last barrier posed by the professionals handling the budget and leaves the rest of the work for the political establishment, where the battle should be easily decided after Yisrael Beitenu joined the coalition.

The economists’ main concern is of a dramatic decrease in state revenue comparedwith the forecast on which the second year of the biennial budget is based, as occurred in 2012. In that year, the deficit was twice the expected figure almost NIS 40 billion which forced the government to undertake extreme measures to close the fiscalhole.

The new mechanism sets the date for estimating the potential of such a gap for 2018 much earlier, in November of 2017. If it turns out that the forecasts of the Ministry of Financewere overly conservative and revenue is higher than expected, nothing happens. But if a gap is discovered, its size will determine the course of action: if it isminor, the government candeal with the difference; but if it is significant, it must turn to the Knesset for help.

A small gap could be plugged by the Ministry of Finance using its available budgetary tools: the special adjustment reserve for 2018 (NIS 3.5 billion) alongside more ordinary measures including spendingcuts and deferments,and the transfer of reserves from the previous year. The Ministry of Finance and the Prime Minister’s Office believe the government could manage a gap of NIS 10-13 billion on its own.

If the deficit gap is larger than the government can handle more than NIS 15 billion the Ministry of Finance will be forced to turn to the Knesset for help with a request for extraordinary measures including tax raises or significant spendingcuts. In a more extreme scenario, the Ministry of Finance could ask to change the framework of the budget in other words, increase the deficit target beyond the existing figure.

The most significant change agreed upon in the new mechanism determines that if the necessary measures to close the 2018 budget are not taken by the end of 2017, then the results willbe the same as if a single-year budget was not approved. This would mean the country would operate starting on January 1 according to a continuing budget for three months until the Knesset is dissolved and elections are held.

Published by Globes [online], Israel business news - www.globes-online.com - on June 7, 2016

© Copyright of Globes Publisher Itonut (1983) Ltd. 2016

Moshe Kahlon and Benjamin Netanyahu
Moshe Kahlon and Benjamin Netanyahu
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