The Finance Ministry downplayed one particular chart in a presentation this week on the 2016 government budget. It was a graph depicting the decline in government debt service payments. Between 2002, when the government’s annual payment on the debt was 7.4% of the country’s gross domestic product, and 2014, when financing the debt shrank to 3.8% of GDP, the State of Israel saved 40 billion shekels ($10.5 billion) in interest payments. That’s a sum almost equal to the entire annual Education Ministry budget, and the State of Israel has managed to accomplish these savings for itself through the amazing process of reducing its debt at a time when interest rates around the world have declined.
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Debt service is not the only budget line that has shrunk over the past decade. An analysis of the period from 2004 to 2014 by the Bank of Israel shows the drastic changes that the government budget has undergone during that period. Two major budget provisions got substantially smaller—interest payments shrank form 12.8% of the budget to 9.2% and defense costs dropped from 23.7% to 21.7%. Together the two developments freed up 5.6% of the budget and all of these amounts went instead to the civilian sector—to education, health and infrastructure.
From 2009 to 2014, government financial reports show, the education budget jumped by 15 billion shekels a year; institutions of higher education got 2 billion more; the health budget grew by 10 billion; and the transportation budget by 4 billion, while the defense budget rose during those years by just 9 billion.
This monumental process, involving diverting resources from funds for defense, but mainly from debt service, to civilian needs was the primary force behind the rise in the standard of living over the past decade. But this force appears to be depleting itself.
The failure of last month’s Locker committee’s recommendations on defense spending policy to have an impact demonstrates the extent to which continuing efforts to cut military spending may come to naught. Even worse, the graph that was downplayed in the Finance Ministry presentation demonstrates that the rate at which interest payments have been reduced has been cut significantly in the last four years, a consequence of the fact that government debt barely declined since 2011 and that interest rates are already at an all-time low.
From that current low point, interest rates can only go up. The only thing that will enable Israel to continue to create those interest savings that it has in the past is by whittling away at our national debt. But in light of how the budget has been managed over the past four years – the lack of discipline and excessive deficits – makes it hard to think that further significant debt reduction could be in the offing.
The 40 billion shekel in free lunches of the past decade appear to be over. If Israel wants to continue to raise the level of government services, and in turn the standard of living of the population, it will need to cut not only fat but muscle. The civilian budget needs to be pared back after a decade in which it barely grew.
That will happen only if we start to manage the government budget in a serious manner and start to weed out unnecessary spending, for example the budget line for encouragement of immigration from Morocco. There hasn’t been immigration from that North African country since the 1960s, but the budget provision has existed ever since.
Budget lines never die
Unfortunately the Moroccan immigrant budget seems to be a symptom of the budget as a whole, with spending provisions that live for eternity. The budgetary fountain of youth has two sources. One is the automatic pilot, the automatic addition to the budget from one year to the next which is the major focus of attention of the Finance Ministry and the other ministries. But as long as additional funds are not requested for a budget line and it does not become part of the automatic pilot, it’s doubtful anyone would take note of its existence, particularly if it’s been there since the 1960s.
The second source involves situations in which spending provisions are recognized as being unwarranted, but there is no incentive to touch them. If Heaven forbid, they try to cut out an unnecessary program, budget managers could find themselves in confrontation with ministry workers’ committees. (And what would happen to the staff of these unnecessary programs?) And they would derive no benefit from the cuts. The money and the job slots would simply revert to the treasury.
And how many of these walking debt budget lines are there? An initial examination by the Finance Ministry and the Prime Minister’s Office raised the absurd spectacle of items such as 40 million shekels, a provision from the 1990s, to encourage immigration from Russia; three staff people responsible for communications with young people through the distribution of printed fliers; 15 million shekels for rather unattended carpenter training; and a whole unit devoted to developing special software for a government ministry at a time when the same software is available on the commercial market.
There is also an opposite example. The Education Ministry wanted to streamline its transportation network by instituting an online system at a cost of 10 million shekels. It asked the Finance Ministry for funding and promised to split the savings with the Finance Ministry, but the Finance Ministry refused to give the Education Ministry a share of the money saved. The Education Ministry decided to go it alone on the project. It saved tens of millions of shekels that were ploughed back into the transportation network.
An incentive for streamlining
Eli Groner, the director general of the Prime Minister’s Office, will have examples such as what occurred at the Education Ministry in mind when he and representatives from the Finance Ministry and the Civil Service Commission embark on an innovative spending review effort. The project will include looking at establishing incentives for ministries that identify obsolete programs and that accomplish savings by upgrading, merging or closing the programs. The incentive is that the ministries will get to keep most of the savings. The ministries will be provided help in identifying where they can save (if perhaps the same program exists at another ministry) and how staff can be transferred to other tasks. The goal isn’t to cut spending, but rather to use existing funds to best effect.
The review will not only look at spending but at entire government units, an innovative approach that as far as I know, outside of Israel, exists only in Canada. The Canadians are constantly examining the relevance of programs to determine if they still serve government priorities.
For a government such as Israel’s, which since the 1960s has not only not reexamined the necessity of government units but also hasn’t systematically looked at government budget lines, the new effort constitutes a real breakthrough. It’s hard to assess the political prospects of such a step in a government hamstrung by antiquated labor agreements, but in an era in which savings can no longer be realized from possible declines in interest rates or defense cuts, it appears to be our only hope for improving the standard of living in this country.