In the Money

The Gaping Hole in Netanyahu’s Pocket

The prime minister has admitted he can’t be trusted with the state budget. His honesty may help us overcome one of our most serious management problems: The ability to responsibly plan for the future.

Emil Salman

Prime Minister Benjamin Netanyahu signed his last agreement with coalition partners on his way to establishing Israel’s 34th government on May 7, nearly three months ago. Even at the time of signing he knew it was an impossible agreement.

Senior Finance Ministry officials met with him during the coalition negotiations and reminded him of the budgetary framework, which he himself had approved only a year earlier. Treasury officials also reminded him of the accumulated overrun in the 2016 budget, which at the time was known to be almost 6 billion shekels ($1.6 billion), based on long-term commitments the government had made in previous years.

The calculation of this forecast of the accumulated overrun in the state budget (which the treasury calls the “numerator”) is a new one. The Finance Ministry published it for the first time as part of the proposed 2015 state budget – the very same budget proposal that the previous Netanyahu government (Israel’s 33rd) submitted but did not manage to pass before new Knesset elections were called.

The publication of the figures as part of the budget framework was the result of lessons drawn from the 2012-2013 budget crisis, which the previous Netanyahu government inherited from its predecessor (Israel’s 32nd government). At that time, the proud government discovered that while Israel had successfully made it through the global financial crisis of 2008, it was now facing losing control of its own budget – a 14-billion-shekel overrun with a budget deficit that threatened to reach a record 4.5% – without any obvious reason or justification.

Even though Israel didn’t eventually suffer a financial crisis, its management of the budget diverged from forecasts because of uncontrolled promises. It turned out at quite a late stage that Israel – so proud of its success in withstanding the financial crisis and feeling it was the country with the world’s best economy – allowed itself to make too many promises for the coming years.

Since the budget was always managed only one year in advance, no one stopped to take a look at the implications of commitments made for farther-off times – and that’s how a very large number of commitments for the medium term accumulated.

All these promises coalesced into the crisis of the 2012 budget, as a result of which Israel was forced to take emergency measures such as raising VAT to 18% – the highest value-added tax rate in the world and with serious implications for the local cost of living.

Lack of control and inaccurate forecasts

This crisis was the result of shortsightedness on the part of the government, and mismanagement of the state budget by the Finance Ministry’s budgets division – which didn’t signal to the cabinet it was getting carried away with its promises for future spending.

The obvious conclusion was changing budgetary procedures. The Finance Ministry, with the approval of Netanyahu, started tracking these government promises for spending in the future. These promises were published for the first time in the proposed 2015 budget.

This forecast budget overrun – the numerator – is, therefore, the result of a process that had been going on for a long time under government auspices – and the lack of control by the budgets division over this process of divergence from budget targets from 2008 until today. Many people, events and processes have taken place over these seven years, which all contributed to this lack of control, but only one thing was left unchanged: at every stage there was only ever a single prime minister – Benjamin Netanyahu.

Netanyahu was there when the government got carried away and promised excessive wages and expenditures, mostly in the wake of the social protests of 2011. He was there when this blew up in the government’s face during the 2012-2013 budget crisis. He was still there when the lessons were learned and the data was collected and released for the first time. And he was still there in May 2015 when all these lessons were trashed – by him.

The fact is that even though Netanyahu knew his new government was starting off with an expected deviation of almost 6 billion shekels in the budget framework, he added to this overrun even more commitments – to the tune of an extra 8 billion shekels – as part of the coalition agreements. In doing so, Netanyahu turned the new numerator, which has only just now been published for the first time, into a joke.

Equally importantly, Netanyahu turned the entire budgetary framework – total spending and the deficit, all of which he set with his own hands as part of a cabinet decision in his previous government – into a joke, too. What’s the point of setting targets if at the time you set them you already know you are violating them?

Continued failure to manage the economy

This behavior returns us to some things the International Monetary Fund wrote about Israel a month ago, in its report on the Israeli economy.

The Israeli budget deficit is structural, they said, and its source is in the tax cuts made from 2003 to 2010 – which were not offset by adequately reducing expenditures at the same time. This deficit is not a result of cyclical weaknesses in the economy and the attempts to reduce the budget were postponed time after time, said the IMF. In theory, Israel has spending and deficits based on debt targets – but they have been changed so many times that, in reality, there is no effective anchor for the budget, they said.

Theoretically, adds the IMF, Israel has rules to manage its budget. But in practice, these targets have been changed more times than they have been kept: In the 24 years since 1991, the state deficit target has been changed 14 times – nearly once every two years, on average.

The deficit target for 2016, which was supposed to be reduced to 2%, was also changed and raised to 3%. The budgetary framework is nothing but a suggestion rather than a true restriction, and year after year the budgets division formulates new tricks – one-time black boxes, construction of army bases on the account of future land sales – in order to hide the fact that the framework is really not being adhered to.

This is how the State of Israel presents itself with the pretensions of being a country with a responsible and well-run budget. Underneath all this, though, hides a policy of shooting from the hip, half-baked, and with a lack of real budgetary management. This cover blinds us and keeps us from seeing how we are really a failure in managing the national economy – but it doesn’t blind the rest of the world. The truth is that even the IMF notices this lack of seriousness, and it has ripped off our mask of hypocrisy.

Numerator moves up a rung

This exposure won’t help very much if there’s no willingness to correct the way we manage the budget. In other words, to publish the government’s future commitments, and then act accordingly. In the 2015 budget proposal, the numerator was released – a sort-of signal to the cabinet of the limits on its freedom of action. The coalition agreements signed only a short time later (though by the new government) have shown that this isn’t enough.

The government knew it was exceeding its budget, but that didn’t prevent it from increasing this overrun even more. That’s why it’s even more important now to upgrade the numerator – and make it a commitment. This means the publication of the government’s future budgetary commitments will not be made just for information purposes, but will act as a restriction on government actions. Every government decision that raises this excess spending will require the government to immediately find either some way to offset it in a reduction of spending elsewhere, or by raising revenues – as part of the same decision.

This is how the Israeli government – which has proved this year that, even when it knows that next year’s budget is already 6 billion shekels over the limit, still adds another 8 billion shekels on top of this – knows how to cut its spending today, in order to correct the overrun forecast only in another 3 or 4 years. Does anyone really think the government is serious about meeting such a requirement?

That may sound like a joke, but Netanyahu doesn’t agree. It turns out he’s the one who ordered the Finance Ministry to make the numerator – which the treasury had planned to continue to publish, in a more emphatic and detailed form – into a commitment. Not just to publish the number, but to demand required spending cutbacks or higher taxes in response.

This is how Netanyahu, who created the problem with his own two hands, is asking the treasury to restrain him so that the next time he sits down for negotiations with his coalition partners, he cannot be extorted any more by the other parties, and can no longer make impossible promises of 8 billion shekels in spending – since there will be an effective limit that prevents him from doing so. The limitation on total spending for the budget in future years.

Let’s be honest, there’s something embarrassing here when the prime minister asks to be restrained. To a great extent, this is an admission by Netanyahu of his own weaknesses – a confession that, without such restraints, he is unable to repel the coalition pressures he is facing. At the same time, there’s also something respectworthy that Netanyahu is aware of his weakness, and is asking for a very harsh restriction to be placed upon himself – a commitment to future cutbacks – in order to overcome one of the hardest managerial problems of the Israeli government: An inability to plan for the future in a responsible fashion.

Netanyahu asked for forgiveness for these sins too late, and now he wants to be forgiven for his own irresponsibility during the coalition negotiations. It requires courage to admit to your mistakes and ask for forgiveness from the public – and, in this case at least, Netanyahu deserves our respect for doing so.