Without a State Budget, Israel May Have to Slash Spending in January

Treasury efforts to avert draconian measures that could lead to a major cut in appropriations have so far come to naught amid an ongoing political crisis

Nati Tucker
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Finance Minister Yisrael Katz at a press conference in Jerusalem, July 1, 2020.
Finance Minister Yisrael Katz at a press conference in Jerusalem, July 1, 2020. Credit: Emil Salman
Nati Tucker

Ministries will be forced to cut their budgets in January by about a quarter of planned levels – a total of 10 billion shekels ($3.1 billion) – bringing many government activities to a standstill, an analysis by the Finance Ministry’s accountant general has found.

Behind the big spending cut, which will in particular hit state-supported nonprofit organizations and ultra-Orthodox educational institutions, is the political chaos that Prime Minister Benjamin Netanyahu and Finance Minister Yisrael Katz have created by refusing to pass state budgets for this year or next, as part of their political war with Benny Gantz’s Kahol Lavan party.

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Worse still, the Knesset has failed to clear the technical legislation the treasury has sought that would enable the government to continue operations in 2021 on the basis of the 2019 budget framework. The legislation hasn’t even been discussed by the cabinet due to the political crisis.

Sources said they expected that at the last minute -- certainly if an early election is called – the Knesset will improve an emergency order adding to the budget. However, as of now, the accountant general has no choice but to prepare for every possible scenario while trying to raise public awareness of the problem in the hope of pressuring politicians to act at least on the technical legislation.

Without a 2021 budget, the government will for a second year in a row base its spending on the 2019 budget, the last one ever approved by the Knesset. In 2020, the 397 billion-shekel 2019 budget was allocated on a month-by-month basis.

On that basis, spending for January 2021 will be capped at 33 billion shekels. But actual spending needs will be about 10 billion shekels more than that, largely due to coronavirus-related spending, sources said.

Directives to reduce spending by 25% went out in a letter from Accountant General Yali Rothenberg to the ministry directors general last week: “There is a real concern that we will face a difficult situation at the beginning of next year because the base budget is very low (2019) relative to government needs after taking into account repayment on debt principal and planned spending to address the coronavirus crisis. … Such a situation will necessitate a further reduction in government spending, even compared to the reduced spending we have seen over the past year.”

Although the letter is written in formal language and out of the need to prepare the government for all possible scenarios, between the lines Rothenberg is criticizing the politicians for the chaos that had led to such a situation. Never in Israel’s history has the government run an entire year without an approved budget for the year and, if the 2020 budget isn’t approved by the December 23 deadline, it will have no budget for at least the first four months of 2021 – until a new government is formed and can approve one.

Three weeks ago, the Finance Ministry sought to solve the immediate problem that will arise in January with a series of legislative amendments and emergency orders to the basic law governing the budget to enable the government to carry on without big spending cuts early next year. Because it entails changes to a basic law, the amendments have to pass three readings in the Knesset each with an absolute majority of 61 votes.

The amendments are needed to cope with the government’s higher spending needs in 2021. Due to the jump in government debt this year, the treasury will need to repay more than 100 billion shekels in principal repayments next year, compared with about 80 billion annually in recent years. The amendment would remove that extra 20 billion shekels from the state’s ordinary spending, so that it doesn’t have to come out of its operating budget.

A religious school opened against coronavirus regulations in the Mea Shearim neighborhood of Jerusalem, October 19, 2020.Credit: Ohad Zwigenberg

Meanwhile, government spending on the coronavirus crisis has also soared to 83.3 billion shekels in 2020 and a forecast 53 billion in 2021 for things such as extended unemployment benefits. The treasury amendments would enable those allocations to continue to be booked outside the ordinary budget as they have been this year.

If they can’t be kept off-budget, all the coronavirus spending will have to be moved into the regular budget and come out of ordinary spending. That includes some 15 billion shekels approved for 2020 that is due to be allocated in 2021.

In addition, there are a host of technical issues that will lead to lower spending starting in 2021. For example, the emergency order adding 11 billion shekels to government spending this year won’t continue into 2021 without enabling legislation. Another is that the drop in the consumer price index during 2020 means the mandated ceiling on government spending falls, too. Nor will spending in 2021 take into account Israel’s relatively fast-growing population.

All told, the gap in 2020 between the ceiling on government spending and expected need is about 100 billion shekels. When the Knesset does approve a 2021 budget, it is expected to reach about 426 billion shekels, not counting off-budget items related to the coronavirus.

If the treasury amendments aren’t approved, it will issue spending quotas to ministries and they, in turn, will have to decide what activities to stop. Recurring spending items will get priority as will allocations for critical services.

Ironically, it will be the politicians who pay the highest price for this. Because they prefer to maintain control over the most politically sensitive spending items, such as support for welfare and cultural institutions, they are generally not classified as recurring and therefore will be among the first to be cut starting in January.

That problem will hit ultra-Orthodox educational institutions in particular, which are classified as state-supported bodies and will be among the first to be affected.

All of this comes at a time when the economy is struggling with the coronavirus and the government should be undertaking fiscally expansive policies. In addition, the delay in approving budgets means that critical reforms that come in the Budget Arrangements Law are being delayed as well.

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