At the beginning of this week, against the backdrop of the setting of the date for approval of the 2025 budget by the government, Minister of Finance Bezalel Smotrich sent a letter to the head of the Budgets Division in his ministry, Yogev Gradus, in which he sets out his intention of changing fundamentally the way in which Israel’s state budget is constructed and spent. "The war further highlights the chronic difficulties in planning and managing the budget up to now, as raised in many reports, committee findings, recommendations, and policy papers written over the years," Smotrich wrote.
The aim is to reduce the Budgets Division’s centralized control of the process, an old argument heard from economists and from other government ministries for years. This will be achieved by, among other things, implementation of a mechanism for transferring surpluses from one year to the next, transparency for agreements signed before the vote but not part of the budget, which Smotrich calls "the shadow budget", a reduction in the number of budget items, and a pilot program for greater budgetary independence for government ministries.
It Is not clear, however, how many of these dramatic changes it will be possible to implement in the forthcoming budget, considering how far the budget process is behind schedule. Moreover, when the government faces a hole in the budget and defense demands that will increase the national debt, strict control is required of ministries’ spending, and it is not certain that this is the most appropriate time to gamble with fiscal responsibility.
To prevent a budget blowout
The criticism levelled from various quarters at the management of the state budget is not new. The "Governance Committee" headed by then Prime Minister’s Office director general Harel Locker stated in its report in 2013, "Relative to other countries, Israel is characterized by especially centralized budget management. Many of the difficulties in governance raised before the committee relate to budget issues and the high level of centralization in the system." On the other hand, the Budgets Division representative told the committee that there was a fear of "decentralization measures that are liable to breach the fiscal framework."
That is to say, the Budgets Division wants control of the activity of government ministries in order to prevent a budget blowout (or even to impose spending efficiency) while the ministries want flexibility and independence over the course of the year, within the framework approved by the Knesset.
Now, Smotrich is putting himself on a collision course with the Budgets Division, following other showdowns since the start of the war. In this case, he is trying to remove the division’s extensive control of the budget even after it has been approved by the Knesset. But sources at the other government ministries, and in the Ministry of Finance itself, believe that Smotrich’s approach is correct and necessary, to solve professional problems that have dragged on for many years.
The first change that Smotrich seeks to promote is the construction of an orderly methodology for updating the budget from year to year, taking into account "natural growth, inflation forecasts, budget agreements, government decisions, and fixed supplements that have always passed." This is in order to prevent a situation, as described by government ministry sources, in which "the formal budget, say for teachers’ pay, is lower than the actual budget the previous year. Has there been a cut in teachers’ salaries? Clearly not."
In practice, they explain, "The Knesset approves a certain budget, but there are supplements that come every year. Take youth movements: the Scouts know that they’ll get an additional budget during the year, but formally they can’t rely on it." In that fashion, government ministries remain dependent on the Budgets Division, even after the formal approval of the budget in the Knesset, for obtaining the supplements they need over the year.
Other Ministry of Finance sources, however, say that rigid items such as teachers’ pay are not touched, but only one-time items that are passed under coalition agreements.
Another move is implementation of a mechanism for transferring surpluses. If a certain ministry doesn’t use up the whole of its budget for a certain year, it can receive part of that year’s budget the following year, but only if its commits in advance to carrying out certain projects. Even when such a commitment exists, the Budgets Division controls the timing of the transfer of the surpluses, and can demand reforms and streamlining measures in return.
A third subject is "budget agreements" signed by the Budgets Division with government ministries, generally before the vote on the budget. These are off-budget agreements for de facto management of the budget, which according to Smotrich create a "shadow budget" not transparent to the public and not subject to oversight by the Knesset and the government. According to sources at government ministries, the aspiration is "to kill this practice", but at this stage Smotrich only seeks to have the agreements approved by the responsible ministers within the original budget, in such a way as to create greater transparency, and in practice to abolish them.
According to sources who oppose such as development, the aim of these agreements is to place conditions on the budget, in order to ensure that it actually serves its declared aim and is not diverted to other needs.
The fourth and last measure that Smotrich demands in his letter is a pilot program giving a few government ministries budgetary independence and the ability to switch budgets between different items within the ministry, and thus deal with changes without having to make repeated requests to the Budgets Division and the Knesset Finance Committee. Smotrich first raised this idea in June. He is now trying to advance it, and has asked the Budgets Division for a list of ministries that it considers suitable for the pilot program.
Smotrich writes that he hopes that these measures "will strengthen the work of the Budgets Division and of the Ministry of Finance as a whole as a professional body promoting reforms and growth engines, and will reduce the large amount of time spent on the ‘mechanics’ of managing the budget and on the treasury function." That is to say, he wants the Ministry of Finance to focus on the structural changes he seeks to advance, instead of most of its manpower dealing with constant discussions and confrontations with other government ministries.
Published by Globes, Israel business news - en.globes.co.il - on October 9, 2024.
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