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The Bank of Israel's annual report for 2007 shows net budget underspending of up to 2.7% every year since 2002, except 2006, compared to 1.5% during 1998-2001. If the more than NIS 3 billion 2008 state budget remains on the same path, more than NIS 8.1 billion budgeted will remain unspent, inconsistent with the Knesset's original plans and decision. Practically speaking, the unspent portion of the budget is usually higher because the bulk of the budget is comprised of loan repayments and interest, which are not included in the underspending figure.

The central bank's report, which assesses the state budgets for 1998-2007, indicates that budgets for an average of 29% of the items were underspent. "This indicates a systematic problem in the method of budgeting and follow-up of budget execution," reports the central bank. The BOI describes the phenomena as "over-budgeting," with 29% of the budget items being budgeted more money than necessary.

The bank raises the possibility that over-budgeting serves treasury interests. Over-budgeting creates a budgetary reserve for achieving goals, beyond the reserves allocated in the budget law, diverting resources that may arise over the course of the year, and at the same time lowering the ministries' effective expenditure ceiling. In other words, the treasury knowingly over-budgets certain items to increase budget reserves.

One instance of an item that has been over-budgeted for years is administrative costs in the Ministry of Internal Security. "Budgeting for this item has increased consistently since 2002, while its actual expenditures have decreased. In 2007 budgeting for administration totaled NIS 52.3 million, while expenditures totaled just NIS 13.6 million or 26% of the budget allocated.

The Bank of Israel believes the continued over-budgeting is surprising in light of the increased commitment to budgetary discipline. "In part, this is a result of the breakdown of ministerial activities into separate items, each of which requires Knesset approval," the report states. There are more than 8,000 of such items, more than any other OECD member country, even without counting defense items, which are confidential. In the Netherlands and Denmark, for instance the state budget contains only 700 items.

According to the bank, over-budgeting is not uniform among government ministries, and as a result, allocation of resources is distorted at the approval stage. Most of the over-budgeting for the period that was reviewed (42%) was attributed to social ministries, which include education and health ministries, which account for just 36% of expenditures.