The Resurrection of Horse Sense

There is one answer to the myriad protests, argues Avi Ben-Bassat: Reform the process of how the state spends its money.

Oren Majar
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Oren Majar

The people are rising up, protesting the deterioration of their standard of living and the slow suffocation of their hopes. Prime Minister Benjamin Netanyahu promises a ministerial team to talk with the leaders of the mass protests. He promises solutiosn will be found. Avi Ben-Bassat, former director general of the Finance Ministry and a senior fellow at the Israel Democracy Institute, thinks there is a more straightforward path. The most effective way to handle the various demands is to change the way the state budget is prepared. That is how to best meet the needs of the public, the professor urged in an interview with TheMarker.

The protests have been over myriad issues - prices of gasoline, housing, cottage cheese, daycare for children. How can the government find an orderly, long-term solution for all these issues? To Ben-Bassat's mind, this all boils down to clever budget planning.

Avi Ben-Bassat: What’s bothering the public is that they pay more tax and get less service. It can be fixed.Credit: Ofer Vaknin

What's mainly bothering the public is that public services have been reduced at the same time that taxes have been climbing, explains Ben-Bassat, a researcher at the Hebrew University of Jerusalem who, together with Dr. Momi Dahan, wrote the book "The Balance of Powers in the Budgetary Process."

"These are clear budgetary issues," he adds. "The budget determines the national order of priorities - not only how much money the country will spend, but also how the government plans to operate in all areas of our lives.

"When preparing a budget, there are two objectives. One is maintaining budgetary discipline, in other words keeping the deficit low so we don't experience implosion like in Greece and Spain. The second is to decide on the order of priorities in the budget."

The national budget has to be shared out between the ministries. It is up to the leadership at the top to set the priorities in a relative fashion, among and within the ministries.

"The first objective [budgetary discipline] is achieved thanks to the centralized power of the prime minister and the Finance Ministry throughout all stages of the process. They decide on the macro issues, such as the deficit and tax rates, almost without involving the other ministries at all," Ben-Bassat described.

His bug-bear is in the second part of budget planning: deciding how the money will be spent.

"The process is too centralized. It is done for the most part in the treasury's Budget Division," he says.

"Around March, the Budget Division asks the ministries for their proposals for the coming year. Some ministries take the question seriously. Others don't even bother to reply to the letter, because they know that in any case they won't be given a say. Some even respond in an annoying manner and submit absurd demands."

In any case, whether the ministries ask for budgets to rescue the nation of for allocations of croissants, the treasury receives the demands and then plans the budget.

And then comes the next snag. The Finance Ministry only sends the budget proposal to cabinet about three weeks before the cabinet discussion on it, says Ben-Bassat. It only sends the entire budget to all the ministries a week ahead of that event.

In other words the ministries have no time at all to study the budget proposal seriously, in depth.

"There is certainly no real partnership," Ben-Bassat observes. "The directors-general of the ministries feel that they have no opportunity to express their opinion."

Another problem lies in budget execution, the professor explains. "Each ministry's budget submitted for Knesset approval contains hundreds of clauses. The entire state budget contains a total of 7,500 clauses. Therefore, after the cabinet has approved the budget, if for example the Health Ministry wants to transfer money within the ministry from outpatient clinics to residents, it has to submit a request to the treasury. There are clauses that require the approval of the Knesset Finance Committee as well. The ministry can't even transfer small budgets, and that undermines efficiency. It's not clear why the treasury is so afraid. After all, they have already decided on the budget framework and the ministry can't deviate from it.

"In Europe, on the other hand, there are only 500 clauses in the budgetary decision-making process. Although in effect there are thousands of additional clauses for the purposes of follow-up and administration, on the decision-making level it's simpler," says Ben-Bassat.

The fact is, he avers, Israel's budgetary process is extraordinarily centralized compared to the rest of the world.

The Finance Ministry rules on matters well outside its field of expertise, for example, the length of doctors' shifts in hospitals.

"If you don't genuinely include the designated ministries in planning the budget composition, you lose professional knowledge, and the result is an inefficient allocation of resources," he says.

How did we reach this state of affairs?

"The budget in its present format is a result of the terrible budget crisis in 1974-1985. Then, government expenditure reached 70% of the gross domestic product, the deficit was 14% of GDP and inflation was 400%. What's happening today in Greece is child's play compared to Israel's debt during those years, which was 175% of GDP. The foreign currency debt was 80% of GDP. The crisis led to the stabilization plan and to changes in the way the budget is managed."

Can budget-planning processes be improved in the coming decade?

"The prime minister must initiate a transition from a centralized to a participatory budget, as is customary in many countries, including Holland and Denmark even though they also have coalition governments.

"According to the model there, the treasury and the prime minister still have a great deal of power, but they give the ministries far more say in planning the budget.

"I suggest the budget in its entirety be centralized, and that the treasury decide on taxation and deficit goals, but that there be more cooperation between and within ministries in planning the budget's composition. The method is to sit down together and conduct joint deliberations, while establishing a decision mechanism.

"In addition, within five years the number of clauses that require treasury approval should gradually be reduced from 7,500 to 500. We could conduct an experiment in three different types of ministries and examine how it's working."

How will these changes help to solve the problems arising from the protests?

"The ministries have greater knowledge, they have firsthand experience of the problems in every area. To speak in economic terms, they are familiar with the demands of the people on Rothschild Boulevard [which is the heart of the protest in Tel Aviv]: the mothers who want day-care centers for their children, the housing shortage, the increase in fuel price, etc. In that way the demands will reach the table sooner, and better solutions will be found."

Won't that undermine the economic stability that was achieved with great effort?

"I consider economic stability, and controlling the deficit is extremely important. We are also suggesting monitoring mechanisms. In my opinion we can both maintain budgetary discipline and streamline budgetary allocations."