Netanyahu, Kahlon Reach Agreement on Two-year Budget

Finance minister wins provisos to adjust spending package at halfway point.

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Finance Minister Moshe Kahlon, left, and Prime Minister Benjamin Netanyahu.
Finance Minister Moshe Kahlon, left, and Prime Minister Benjamin Netanyahu.Credit: Reuters

Prime Minister Benjamin Netanyahu and Finance Minister Moshe Kahlon agreed on Sunday that the next budget will run for two years, with provisos allowing treasury planners to make adjustments to it at the halfway point.

The 2017-18 budget will include a mechanism that lets the treasury’s budget division adjust tax rates at the end of the first year in the event that collections are lower than forecasts. Netanyahu and Kahlon also agreed that the treasury would be able to introduce an abbreviated Economic Arrangements Bill before 2018, even though there will be no new budget for the year.

The provisos are aimed at reassuring the treasury budget division, whose chief, Amir Levy expressed concern at Sunday’s meeting that a two-year budget would not give the government enough flexibility to alter fiscal policy to meet changing economic conditions.

Policy makers are still living with the painful experience of the last preplanned two-year budget in 2011-12, which left the Finance Ministry with a 40-billion-shekel ($10.55 billion) fiscal hole that had to be filled with sudden and unpopular tax hikes. Netanyahu, however, looks at a two-year budget as a way of buying coalition peace by avoiding the need to go through two budget debates in the cabinet and Knesset over the next two years.

Kahlon had agreed to a two-year budget as part of the coalition agreement his Kulanu party signed to join Netanyahu’s government. But the finance minister had concerns about the idea and won Netanyahu’s backing that he would be entitled to “protect the 2018 budget.”

Although the exact method has yet to be worked out, it will involve formal meetings between the budget division and the prime minister. Kahlon would be authorized to go to the Knesset in November 2017 to seek adjustments to the budget for the following year.

Bank of Israel Governor Karnit Flug, who attended the meeting in her role as economic adviser to the government, avoided taking a stand on the issue.

“A biannual budget could make it harder for the government to react to unexpected changes, but these risks can be reduced by allocating a bigger internal reserve, allow for more flexibility within the budget and a more exacting use of the numerator,” she said, referring to accumulated overspending in the state budget.