Two-year Budget: Better Planning, Less Flexibility

The Finance Ministry argued that passing a budget only once every two years would free up the ministries and the lawmakers for more important things, while detractors of the plan said it would deny the government its flexibility.

It's late December, a time when the Finance Ministry and the Knesset are generally bogged down getting the budget approved for the new year. But not this year - 2012 will be the second year of the two-year budget approved a year ago.

The 2011-2012 budget was Israel's second two-year budget, after preparing state budgets a year at a time for decades. The Finance Ministry argued that passing a budget only once every two years would free up the ministries and the lawmakers for more important things, while detractors of the plan said it would deny the government its flexibility.

Trajtenberg - Emil Salman - October 4, 2011
Emil Salman

So what's the verdict?

TheMarker asked three Finance Ministry director generals for their opinions on the matter.

Doron Cohen, who has been the ministry's acting director general for the past six months, believes the two-year budget has been a lifesaver. "We need to thank God that we have a two-year budget," he says.

The cost-of-living protests broke out in July and August, the months during which the government is generally preparing its budget, he noted. Had it been doing so this year, it would have drafted a budget with social priorities, he said. But then, in September and October, it became clear the global economy was slowing, and taking Israel with it, he noted. Had there been no two-year budget, the government at that point would have needed to overhaul the draft prepared only two months earlier - an impossible workload, he said.

"The big test of every government is its ability to plan and execute - over the long term," he said. Having a two-year budget also helps ensure that the government maintains its fiscal discipline, he added.

The ministry's budgets department hasn't been working on a budget this year, which means it has had time to plan reforms, structural changes and the next two-year budget, as well as to respond to crises, including the doctors' strike and the Trajtenberg recommendations, he said.

He acknowledged that on the downside, the two-year budget meant less flexibility, but said he believed the benefits outweighed the disadvantages.

Yarom Ariav, who was the ministry's director general from 2007 to 2009 and then was the temporary budgets department head while the 2009-2010 budget was being prepared, noted that the two-year budget had begun due to a lack of choice: The Knesset had not passed the 2009 budget in time, and once it got around to doing so, in mid-2009, it decided to approve a budget for 2010 too.

The advantages of such a budget are that they enable more long-term planning, he said. However, like Cohen, he acknowledged that the lack of flexibility was a problem. "The two-year budget sets the government's path for two years, with few options of straying, even though there are unexpected events all the time," he said.

For instance, the budget limits the Finance Ministry's responses to the brewing recession and the social protest, he noted.

Some of the changes to social priorities demanded in the Trajtenberg report would have been best passed as part of the Economic Arrangements Law, which is passed alongside the budget, he noted: This would make the process smoother, since the recommendations would not be picked to pieces.

Implementing the Trajtenberg recommendations will necessitate a new budget for 2012 anyway, he added.

A ministry source said the protests led to the reallocation of NIS 4 billion for social causes. Most of that money came from budgetary reserves or the defense budget, and was transferred to education, welfare and housing, the source said.

Prof. Avi Ben Bassat, the ministry's director general from 1999 to 2001, noted that a two-year budget distributes resources more efficiently and smoothes the decision-making process while minimizing budgetary demands.

However, while its upsides have to do with expenditures, its downsides have to do with revenues - due to the recession, the government's revenues are now likely to be lower next year than forecasts stated when the budget was drafted, he noted.

In addition, Israel is not taking advantage of a big potential advantage of such a budget - letting excess funds from the first year be used in the second year, he noted.

A former top finance official pointed out that no other countries used two-year budgets, and said that the uncertainty of planning two years ahead made them a bad idea.