Was Israel's Budget Deficit Fake News in 2018? Or Will It Be in 2019?

Treasury officials have been trading charges about who is responsible for allegedly cooking the books and why they did it

Finance Minister Moshe Kahlon at a government meeting, Jerusalem, January 27, 2019.
Amit Shabi

After three peaceful years, bad blood is now coursing through the halls of Israel’s Finance Ministry. The traditional tensions between the budget division and the accountant general’s office is back and the reason is the 2018 and 2019 budget deficits and who has been engaging in creative accounting.

Officially the deficit came in at 2.95% of gross domestic product in 2018, right where the budget had targeted it. But that very exactness raised eyebrows if for no other reason than only two months earlier spending and revenues trends pointed to overspending for the year of 3.1% and maybe 3.5% – way over the target.

The rumor mill had it that the Accountant General Rony Hizkiyahu’s office had cooked the books for his boss and long-time friend, Finance Minister Moshe Kahlon. The assumption was that Hizkiyahu wanted to save Kahlon and his election campaign any fiscal embarrassment by moving ministerial spending to 2019 from 2018.

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It was the budget division that was behind the rumors. Its relations with Kahlon and treasury Director General Shai Babad have had their up and downs over the years, but mainly downs. The rumors angered Hizkiyahu’s office, which denied everything. As evidence that spending wasn’t deferred, it presented a figure that showed that spending reached 100.3% of its authorized level.

More recently, the accountant general’s office has taken the offensive and is claiming that the budget division was cooking the books in the other direction and artificially increasing the deficit by pushing some budgeted 2019 spending into 2018. The budget division, so it was claimed, did that because it expected the 2019 deficit to be an even wider 3.6%, or 10 billion shekels ($2.7 billion).

Advancing spending from next year into the current year is no less cooking the books than the other way around. But in recent years this practice has become widespread amid strong economic growth, tax windfalls and low deficits. In years in which the actual deficit was a lot lower than the target deficit, moving next year’s spending provided a kind of insurance policy against any deficit problems that might arise the following year.

In any case, the practice was more legitimate than deferring expenses since the government was in effect choosing to pay bills earlier.

The year 2018 was another story. The fact that the deficit officially came in on target meant there was no room for piling in 2019 spending into 2018 and starting 2019 from a strong fiscal position. The accountant general’s office, nevertheless, accuses the budget division of doing just that even though it was well known that the deficit would not be under target as it had been in past years.

The claim goes deeper: When Hizkiyahu refused to let the budget division move 2019 spending items into 2018, the division went behind his back and convinced the ministries to move spending forward. They knew next year was going to be difficult because of a technicality in spending rules that deferred many government spending commitments undertaken from 2016 until 2019.

Worse still, the government had ordered an across-the-board cut of 11% in ministry spending in anticipation of the growing deficit – and even that would still leave a 3.5 billion-shekel fiscal hole.

The budget division denies the charges. It admits it urged ministries to make sure they spent the 2018 budgets in full, but says it never suggested moving 2019 expenses into 2018. The division maintains that the real problem is that the accountant general has been deferring spending and that the dastardly deed will be revealed in the next few days when the January budget figures are released and show a deficit far bigger than previous years.

Why the budget division wanted a bigger 2018 deficit and the accountant general wanted a smaller one is about politics. Hizkiyahu wants to make Kahlon – the man who appointed him – look good.

The budget division, on the other hand, has had a sour relationship with Kahlon and would be pleased to embarrass him with a big deficit. In 2019, someone else could well have the finance portfolio and given the likelihood that he or she won’t gain control of it till the second half of the year, the blame for a big deficit this year would likely fall on the shoulders of the budget division.

Sources in the budget division say that claim is all wrong – that a big 2019 budget deficit would serve them by forcing the next government to implement spending cuts, if not in the current year than in 2020.

Whichever version of the story is right misses the main point, however, which is that the treasury is playing a dangerous game with the numbers. Both treasury divisions’ credibility is being undermined and that will be a serious problem this year as they struggle to cope with a fiscal situation that is much more challenging than anything that Israel has experienced in recent years.