Israel's fiscal follies
Shenanigans over the defense budget reveal the need for serious reform of the government's entire budget-making process.
What is the right size for the defense budget in 2013 in line with the findings of the 2006 Brodet committee?
The Tishler Committee appointed by the defense minister and headed by professor Asher Tishler, the dean of the Faculty of Management at Tel Aviv University, decided that the appropriate sum would be NIS 66 billion. According to the finance ministry's budget branch, an appropriate number would be closer to NIS 55 billion. Appointing itself as mediator, the Bank of Israel maintains that a fitting sum would be closer to NIS 60 billion.
Don't hold your breath. In the end, the 2013 defense budget will be set like it has been almost every year: The government and the Knesset will authorize a low-ball figure similar to that presented by the Finance Ministry. Afterwards, over the course of the year, additional defense spending proposals for various secret projects will be passed that will add billions of shekels in defense spending. The end result will be a total defense budget between NIS 55 billion and NIS 65 billion, closer to the figure set by the Bank of Israel from the start.
"There is a silent agreement between the Finance Ministry and the Defense Ministry," according to a senior government source. "In order to pass the budget, they present to the government what appears to be a cut in defense spending, but in practice they return all the funds that were cut and even more back to defense establishment over the course of the year. In practice, they are deceiving the government."
The culture of bald-faced lying when it comes to getting budget approval is, in this instance, shared by both the defense and finance ministries. It has also been pretty much out in the open since the Bank of Israel assumed the role of mediator in discussions over drafting a defense budget in accordance with the Brodet Committee findings and revealed this shabby behavior. Except, this is just a one-time initiative by the Bank of Israel and its public sector unit, which tracks the implementation of the government budget on behalf of the Bank.
Based on the large deviations in originally planned spending that accumulated to the 2012 budget, the deficit this year is expected to be twice the target amount and will reach 4 percent or more of GDP. The hefty additional spending measures that are expected to be tacked on to the 2013 budget, the size of the expenditures of government obligations will reach approximately NIS 14 billion more than what the budget would allow, which will necessitate the biggest budget cuts ever made – and the Bank of Israel's initiative isn't enough to address this problem.
Where is there public supervision of the budget process – its size, its composition and its implementation? In most of the world, it is accepted that parliaments supervise the government budget, and for that purpose they have independent economic research bodies that go as far as to check all the forecasts and assumptions that form the basis of the budget. In parts of the world, there are even independent government ministries with the task of keeping track of budgetary policy.
The fiscal councils have received increasing power following the European financial crisis – when the European Union belatedly revealed that under its nose the Greeks had faked their own national economic data. The United States, Canada, Great Britain, Sweden and the Netherlands all have fiscal councils of this type, which make hell for their respective governments and finance ministries, but also enable real public supervision of these countries' budgetary policies.
But in Israel there is neither a fiscal council nor independent supervision by the Knesset of the government's budget. When MK Shelly Yacimovich (Labor) claims the effective corporate tax rate in Israel is one of the lowest in the world because of the tax reductions received by the large companies through the Capital Investment Promotion Law, she's mistaken, but it's not her fault. A United States Congressperson wouldn't make a mistake like Yacimovich's simply because they are part of the body that supervises the federal budget, and which annually calculates the effective corporate tax rate in the U.S. (which incidentally, is much lower than Israel's). In Israel, the Knesset doesn't have professional tools like these, and clearly the supervision over the government's budget that is provided by the Knesset isn't worth a thing.
Consequently, Knesset members attack the government and the Finance Ministry, throwing around superficial slogans that aren't based on serious, fact-based examination. Even in the government, the Finance Ministry is attacked and the treasury is gossiped about, all without serious fact-based analysis. The budget process, in which all the information and jurisdictional authority rests in the hands of the Finance Ministry , invites these kinds of rumors – even though the only body that has ever seriously looked into them, the Bank of Israel, doesn't have any authority over the budget.
"It's easy for everyone to tread all over the Finance Ministry," says a senior government source. "But breaking the hold of the Finance Ministry [over the budget process] is dangerous and it also isn't clear that it's possible at this point. Years of taking away from the authority of other ministries and placing it in the hands of the Finance Ministry, the Justice Ministry and the Civil Service Commission, have left the other ministries completely atrophied – and almost without qualified professional personnel. Today the government is in a state where it should declare a total loss, and everyone who comes to work in the government experiences continuous disappointment. One has to be an altruist to agree to work here."
How do we fix a completely broken system like this? We need to deal with all the weak links in the government's chain of operations. We should decentralize authority from the finance ministry to other government ministries so that these ministries will spread less rumors and take greater responsibility. We must also try to improve the quality of the government workforce by changing employment contracts and the work culture in the public service. Knesset members must be also reminded that their central job responsibility isn't to unleash bombastic declarations to the press, but to support the task of supervising the government by establishing a serious, independent supervisory body – like the fiscal councils. Last, but perhaps most fundamental, voters must remember to demand all these things from the parties that represent them in the Knesset. Otherwise the government won't be able to keep the car on the road.