Analysis

Israel Is Going to Pay a Heavy Price for Its Fiscal Follies, and This Top Official Knows It

The treasury's accountant general doesn't want to be there when Israel's credit rating is lowered, and that's why he's stepping down

Meirav Arlosoroff
Meirav Arlosoroff
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A closed restaurant in Tel Aviv, July 2020.
A closed restaurant in Tel Aviv, July 2020. Credit: Tomer Appelbaum
Meirav Arlosoroff
Meirav Arlosoroff

Rony Hizkiyahu, who announced this week that he was stepping down as the Finance Ministry accountant general, has had a distinguished career. The 69-year-old has served as supervisor of banks at the Bank of Israel during the 2008 financial crisis and as chairman of the First International Bank of Israel, one of the most senior posts in Israeli banking.

He assumed the role of accountant general at 66, an age when most people are retiring. It was an act of public service by a man who has seen and done it all and wanted to give something back to his country.

Now, Hizkiyahu is throwing in the towel, more than a year before his official term of office is due to end. He said he will stay on until October or until the government approves a 2020 budget, whichever comes first. But either way he is quitting in the middle of a health and economic crisis of historic proportions.

Since the budget doesn’t seem likely to be approved any time in the foreseeable future, it looks like Hizkiyahu will only be leaving his job in October. As things are shaping up, by then Israel will be operating without a budget and be on its way to a fourth round of elections. It will badly need an experienced accountant general who can navigate the budget during a crisis.

Accountant General Rony Hizkiyahu
Accountant General Rony HizkiyahuCredit: Emil Salman

Why is he leaving the command post in the middle of the battle? Some say Hizkiyahu is hoping to arouse public opinion by underscoring how desperate the situation is. Yes, desperate.

It seems that Hizkiyahu fears that Israel’s fiscal situation is going to become critical in the coming months, endangering its international credit rating. He doesn’t want to be the accountant general under whose watch Israel’s rating is lowered for the first time in decades. “Not on my watch,” is what he is saying.

There are three reasons why the situation has become so desperate.

The first is that the 2019 budget, which is the one the government is using on a month-to-month basis in lieu of a 2020 budget, is wholly inappropriate for Israel’s current needs. It calls for 400 billion shekels ($116 billion) in spending, but the real spending needs of the government this year are between 415 billion and 420 billion.

Most of the gap will emerge in the final months of the year.That’s because the accountant general hoped there would be a 2020 budget this year and spending could be put on a more orderly basis. Hizkiyahu meanwhile had pressured the ministries to restrain spending so that they didn’t hit the top 420 billion end of the range. The rest of the 15-billion-shekel gap was supposed to be solved in the 2020 budget.

Prime Minister Benjamin Netanyahu, who is responsible for the fact that we have no 2020 budget and may be holding a fourth election, is living in La-La Land. This week he announced the defense establishment needs a 3-billion-shekel budget supplement, which would deepen Israel’s fiscal hole to 18 billion shekels.

Hizkiyahu decided he wouldn’t be the one to make the impossible cuts for Netanyahu in the budgets of the youth movements, community centers, welfare organizations, the services required to open the 2021 school year and the like just because Netanyahu refuses to take responsibility and pass a budget.

The second reason Hizkiyahu has had enough is the coronavirus. Before the pandemic struck, he was struggling to make the 15 billion shekels in spending reductions. Now Israel is allocating 200 billion shekels just on the coronavirus, including 6.5 billion on a universal handout the economy doesn’t need. The size of the coronavirus spending makes all his previous efforts absurd; he stands no chance of convincing the public and the ministries to implement those cuts.

No matter, there’s an accounting trick that can solve this. It’s called the box. The treasury is still presiding over a 400-billion-shekel budget for 2020 while opening a separate budget of 200 billion for the coronavirus. It’s being managed separately in order to underscore that it is a one-time emergency that is apart from the state’s ordinary spending needs.

The problem is that the politicians, first and foremost Netanyahu, aren’t making the distinction. They want to have the box and open it, too.

Thus, Netanyahu wants the 3 billion shekels in extra defense spending to be put in the coronavirus box, even though it has been designated for one-time emergency costs connected with the pandemic.

If the prime minister gets his way, Israel will be on the way to losing control of the budget altogether. Creative accounting will be the order of the day and Hizkiyahu wants no part of it.

The third reason for the desperation is the lie that’s been told to the credit rating agencies. To date they haven’t moved to lower Israel’s rating because the accountant general and Bank of Israel have assured them that despite the seeming chaos everything will be okay. The government will pass a budget and the coronavirus is a black swan that is being kept separate from the rest of the budget in its own box.

The problem now is that the lie has been exposed: Netanyahu is in a standoff over the budget and talking about another election. He is breaking all the fiscal rules and throwing money into the wind. The “it will be okay” promises have become another case of Isra-bluff.

The international ratings agencies aren’t suckers. They know when someone has tried to pull the wool over their eyes. The loss of control over the budget and the economy and, even more, the lost of trust in Israeli promises, is very likely going to cost us dearly. The risk of a rating downgrade has become a very real prospect. Hizkiyahu doesn’t want his distinguished record to end with a blot.

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