Micromanagement Out of Control

The Finance Ministry and the prime minister have too much control over the state budget - abnormally so - says former ministry director general Avi Ben Bassat.

A lethal forest fire. A refinery explosion and a construction industry corruption scandal - no, this isn't Israel 2010. It was the Netherlands at the start of the decade. The result was an explosion in legislation. Holland 2003 became a clumsy, bureaucratic state with a business-unfriendly environment. Sometimes companies had to send the same information in duplicate to two different agencies due to the lack of coordination. The cost of maintaining this bureaucracy was estimated at 3% of GDP.

Avi Ben-Bassat
Ofer Vaknin

Now, after two reforms in seven years, Holland is considered a leader in removing bureaucracy from the public landscape, as the OECD put it. Business licensing procedures have been streamlined. Government offices have become more efficient. Costs of regulatory and enforcement tests have been cut 25%.

Israel needs just such a program of government streamlining, urges Avi Ben Bassat of the Hebrew University of Jerusalem and the Israel Democracy Institute. "For us to have a better, stronger state and society in 10 to 20 years, we need to change the way we think and focus on domestic issues," says Ben Bassat. "In fact, it could come naturally after the resolution of our country's disputes with its neighbors, though a peace agreement is not a necessary condition for this," he explains.

"In order to attain national goals in fields such as education, business, work and government, we need to look inward," he says. "Currently our public energy is invested in security, and any surplus goes to specific problems. More public energy should be diverted to public issues. Everyone is tired of dealing with the dispute with our neighbors, and not enough energy is left for domestic issues."

One problem that impedes economic growth is how the state budget is drafted, states Ben Bassat, a former Finance Ministry director general. The budget is drafted and implemented in a very centralized way, and this needs to be changed, explains the Hebrew University Professor.

"These two processes, drafting and implementing the budget, are largely controlled by the Finance Ministry and the prime minister. Holland already has implemented a reform to undo a similar form of centralization, and there is no reason for this not to happen in Israel, too. The Finance Ministry's agreement is a precondition," he explains.

Ben Bassat is not the only person who thinks this. A 2003 survey conducted by the World Bank and the Organization for Economic Cooperation and Development found that Israel's economic policy is set and implemented through a very centralized process when compared to how things are done in other countries. The survey established that Israel ranks high on the list of OECD countries with the most centralized processes for determining economic policy.

"The survey shows that Israel has a strategic surplus in how much control the Finance Ministry and the prime minister have over economic policy," Ben Bassat says. "The finance minister and the prime minister are not independent of one another, which helps cause this. Without the prime minister's support, the budget and the economic policy would not win a majority in the cabinet."

How does such a strategic surplus express itself?

"There is limited - and misdirected - collaboration between ministries on preparing the budget. After the [finance ministry's] budget department drafts the budget, it shows its proposal to the relevant ministry three weeks before the cabinet vote. The full picture of ministry allocations is disclosed a week before the vote. Not only are ministries not involved to any significant degree in formulating their budgets, they have an impossibly short amount of time to prepare alternatives and present serious criticism. The Finance Ministry's power derives from concerns about budget discipline."

How does this maintain budget discipline?

"When a group of friends go out to a restaurant, they could pay in two ways: One is that everyone orders what he wants and they all split the bill evenly at the end. The other is that each person orders what he wants and pays only for what he ordered. Under the first scenario, you could imagine that the total bill would be higher, and that's what happens with the state budget. If all the ministers were to take part in the budgetary process and order whatever they wanted, the result will be a larger budget and higher taxes. If there is a deficit, the education minister, for instance, would not be blamed, but rather the finance minister and the prime minister would."

Ben Bassat proposes processes that he says would improve cooperation, protecting the budget and the Finance Ministry's authority while promoting better government efficiency. Such processes are liable to stir opposition, he admits, but they are viable and necessary. "In Holland 10 years ago the finance minister wasn't happy about cooperating, but in the end everyone realized that the reforms were needed to improve government performance," he says.

How to draft a budget

Ben Bassat proposes that the decision-making process be divided into two stages. "In the first stage, the macro-economic factors should be determined, starting with the size of the budget and tax policy," he says. "At this level, the finance minister and prime minister's authority should be kept."

He continues: "The moment these [macro-economic] considerations are set, the second stage can begin. This stage involves determining allocations for the ministries in a way that reflects the government's priorities, and setting line items within each ministry's budget. This second stage requires cooperation between the Finance Ministry and the other ministries. If each ministry's total is set from the start, there will be no deficit."

Ben Bassat adds, "Discussions should be based on costs and benefits. Each ministry should present goals and say how much they would cost to achieve, and what benefits they would bring. Elected officials should be the ones who set priorities, but professionals also need to be involved in the process: They would explain how much it would cost to meet a specific goal, and what the price of missing it would be, too. Such discussions do not happen today."

Reducing the number of budgetary items

Another step would be giving each minister more latitude to redirect budgets within his or her ministry, says Ben Bassat. The state budget has no less than 7,500 line items that require the Finance Ministry's approval should a ministry director general want to shift money between them.

Thus, Ben Bassat explains, if an epidemic breaks out and requires a quick response, the Health Ministry needs the Finance Ministry's consent before it can shift allocations within the ministry's budget.

"I found 825 such items in the Education Ministry's budget," says Ben Bassat. "That means the government is micro-managing at an abnormal level. If you want to re-designate money for pencils in order to buy paper, you practically need the Finance Ministry's approval.

"The Health Ministry has 718 such clauses ... That significantly harms efficiency. In contrast, other states have 500 line items that require permission to change; they manage to maintain budgetary discipline without resorting to such micro-managing."

Is such a change practical? How much time would it take to reduce the number of such budget items?

"These such items should be reduced from 7,500 to 500 within five years. In Holland, there were thousands of such items at the beginning of the decade; they were reduced to 500."

What happens when there is disagreement between the ministries and they can't resolve it?

"Regulations must be set to mediate such disputes. Sometimes the prime minister needs to get involved."

Less economic arrangements

Another problem, Ben Bassat says, is the lack of transparency in the budget decision process.

"The cabinet receives a very thin report on the budget draft, which includes the Economic Arrangements Bill. It does not include enough information for informed decision making. In particular, it does not say how much each change will cost us. The Knesset receives more information before it votes on the budget. The cabinet does not get tables summarizing what has been added, what has been taken out, and what remains. It's only words. Lots of words and very few numbers. There is no real monitoring oversight during the critical cabinet approval process."

How can that be improved?

"The use of the Economics Arrangements Bill should be limited. It has become an instrument for making hasty decisions without serious discussions, sometimes on topics that do not relate to the budget."

The Economic Arrangements Bill became a routine feature starting in the mid-1980s, he explains. At first the use was limited, but it has expanded over the years.

"Some of the clauses in the Economic Arrangements Bill have no budgetary significance," says Ben Bassat. "That is absurd. This creates problems - there is no public discussion about these issues, and the cabinet and the Knesset do not seriously discuss the bill. I think the Economic Arrangements Bill should be used only in times of crisis, defined as a decline of GDP-per-capita of at least 0.5%. And the Economic Arrangements Bill should be limited to things related to the budget."