Analysis

Israeli Treasury Officials in a Panic Over the Deficit

Accountant General Rony Hizkiyahu has sparked a revolt by freezing government spending as this year's deficit approaches a far-higher-than-planned 4%

Accountant General Rony Hizkiyahu
Emil Salman

Can a government staffer sue the government? The question isn’t crazy. It was actually thoroughly investigated in recent weeks by ministry directors general wondering if they had grounds to file a High Court petition against a fellow official – Accountant General Rony Hizkiyahu of the Finance Ministry.

The directors general found that they had no legal authority to sue. If a staffer thinks a fellow official has exceeded his or her legal authority, the protocol is to have the matter checked by the attorney general, the Prime Minister’s Office or the Knesset. And that’s what was done.

Directors general  including at the interior, labor and agriculture ministries  filed a complaint with Deputy Attorney General Meir Levin, the Finance Ministry’s legal counsel, the director general of the Prime Minister’s Office and Moshe Gafni, the chairman of the Knesset Finance Committee.

The move comes amid a government paralysis of sorts; the country has been led by a caretaker government since April, when the first of this year’s two Knesset elections launched a political deadlock.

The complainants are angry about an unusual directive that Hizkiyahu issued last week: He ordered a freeze on any new government spending this year. He instructed ministries not to enter any new contractual commitments, including those due to be signed in the year's final months. He also insists that he sign off on any commitment topping 200,000 shekels ($56,800), and he has halted the solicitation of bids on government work, including bidding in which the winner has been selected but not yet notified.

In short, Hizkiyahu has slammed the brakes on government spending and  is depriving ministries of their authority to spend money.

Too draconian, he wrote

Particularly unusual is that Hizkiyahu has imposed the restrictions as of October 28, two months before the end of the year. In the absence of an approved state budget for 2020, and because there is no fully functioning Knesset or cabinet, it was already clear to the ministries that as of January 1 the accountant general would be overseeing spending, allocating funds pro rata each month based on the spending levels of this year’s budget.

“I am not disputing that things must be prepared properly for the 2020 budget, which will apparently be managed on a 1/12 basis,” the director general of the interior ministry, Mordechai Cohen, wrote to Hizkiyahu and the head of the Finance Ministry's budget division, Shaul Meridor.

Mordechai Cohen, the director general of the Interior Ministry.
Eyal Toueg

“Nevertheless, the accountant general’s directive to the ministry comptrollers that they must act to reduce new contractual obligations, even at the price of not using all the 2019 budgets, is unprecedented and something I oppose," Cohen wrote.

"Since this involves a state budget that has been approved by the cabinet and the Knesset … it would have been appropriate for such a decision to be considered by the cabinet, along with the presentation of alternatives and a decision on priorities.”

In comments that were less diplomatic, several ministry directors general have argued that Hizkiyahu is violating the law by exercising authority he was awarded for the 2020 budget and applying it to this year’s budget. They say the authority to decide how funding for this year should be divided rests not with Hizkiyahu but with the Knesset.

And almost all the ministry directors general agreed that Hizkiyahu’s decision was draconian, something they were unprepared for that badly impedes the government's functioning.

Invitations for bids for government work that were already in the final stages have been suspended. Contracts that extend into 2020 are suddenly being annulled, and long-term projects that extend into next year and contracts that have been renewed on an annual basis  residential facilities for at-risk youth, for example  are up in the air.

The legal controversy is in full swing. The Justice Ministry is still investigating, but the Finance Ministry has approved what its accountant general has ordered. Treasury officials argue that because any contractual obligations that are entered into now would be carried out next year, it makes sense to halt the process now.

But even the Finance Ministry has been stung by the freeze. The Tax Authority, which is part of the ministry, says tax collections will suffer, increasing the deficit further.

Impossible situation

This crazy internecine battle stems from the crazy situation the country is in: the absence of a fully functioning government. This year's deficit is forecast at between 3.6% and 4% due to a continued decline in tax revenues. We'll apparently finish the year with around 315 billion shekels in tax receipts, almost 10 billion less than originally planned. And spending by the ministries has exceeded what was budgeted.

Under ordinary circumstances, the cabinet would have convened and raised taxes, perhaps by eliminating the value-added-tax exemption on fruits and vegetables or the $75 exemption on personal imports, or the income tax exemption on rent exceeding 5,500 shekels. Or it could have cut spending. But with no functioning government, and with no new coalition government forming for perhaps even the next six months, there's no one to make such decisions.

The authority to manage a budget that hasn't been approved is shifting to the accountant general. In previous cases where the accountant general has managed the budget, there were surpluses. In other years when 1/12 monthly budgeting was implemented, the budget provided flexibility and financial reserves, which eased the allotting of funds to each ministry.

That’s not the case for next year, though; next year’s plan will be based on the 2019 budget burdened by a far greater deficit than originally targeted. For example, the 2019 budget for the Transportation Ministry provided about 20 billion shekels, but the ministry will have spent about 30 billion.

Actually, the Finance Ministry is pleased with the high spending at the Transportation Ministry, because the country has been facing a crisis in   transportation infrastructure, and any progress on that score is welcome. But how can the Transportation Ministry be allowed to continue spending at its usual pace when next year we have the monthly 1/12 government spending allocations based on 2019’s budget?

The short answer is that Hizkiyahu is in a bind, facing conditions for managing the budget that are almost untenable. His directive last week reflects an attempt to square the circle and rein in spending based on authority that's the subject of debate.

The result is bedlam and frightful government management that's directly harming the economy. Staffers at ministries are warning that the situation could actually slow economic growth, which was already sputtering, thus the drop in tax revenues. A possible downgrading of Israel’s credit rating, following a second year with the deficit far exceeding the original target, is also a possibility. That’s a direct result of the government vacuum as politicians continue to bicker over the formation of a new coalition, risking a third election in less than a year.

Sources close to Hizkiyahu have told TheMarker that the 2019 budget was actually approved at the beginning of 2018, meaning that there's a disconnect between that budget and current needs.

“We don’t know if we’ll even manage to pay what's owed in 2020," one source told TheMarker. "Then we learned that there are ministries beginning to create work on the ground, entering into contractual relations for next year’s spending," one source told TheMarker.

"We can’t accept that .... It’s obvious that important contractual relations will be approved. Everyone needs to understand that the management of the 2020 budget will be very complicated, and it's our responsibility to take steps now. There's no alternative and everything is in accordance with the law.”