A 7-step Plan for the Freshman Finance Minister

Here's how the novice finance minister can tackle economic gaps before they turn into deeper chasms.

Some time in August of 2014 Finance Minister Yair Lapid will rub his eyes in disbelief. He’ll be looking at the draft of the budget for 2015 and his jaw will drop. The list of decrees and cuts that will be required will make the decrees of his first budget look like child’s play.

“How did this happened?” he will ask in dread. “I promised the citizens that in two years’ time it would be paradise here.”

The answer has to do with what is known at the Finance Ministry as “autopilot” – an accumulation of multi-year commitments that significantly exceeds the limits the government imposes on itself.

In addition, it’s not certain they’ve told the finance minister that he is in the grip of a deadly vise in which not only has he inherited huge past commitments, but he is also confronting a cruel fiscal law that will squeeze harder than it has this year.

The relatively new expenditure law, in its complex formulation known only to initiates, “punishes” the government if it increases the ratio of debt to GNP and if the growth rate declines. Therefore, when the deficit increases and growth decreases, as everyone expects, the budget thumbscrews on the government will press harder.

Why does it look to me like the finance minister hasn’t really understood the problem he will face in 2015? His first action on this budget was to take out a loan from the defense establishment at cutthroat interest, which he will have to pay back in 2015. The generous concession Histadrut labor federation chairman Ofer Eini granted him will also have to be paid back in the next budget. This is to say that the finance minister has continued to write hefty post-dated checks on the assumption that the future is rosy and distant. But the future comes all too fast and if you believe you are going to be the finance minister who will have to deal with it – you have a problem and so do we.

In my estimate, as of today the commitments in 2015 already exceed the expenditure limit by more than NIS 10 billion. The expected wage agreements, security crises, coalition pressures and private members’ bills will add many more millions.

So what can be done? Grapple with the 2015 budget today. How? Turn off the autopilot and take your seat in front of the cockpit dials.

A number of essential steps for the finance minister’s immediate attention:

1. The most important reform you are facing is maximum efficiency in the public sector with a considerable improvement in its functioning. The only way to grapple with the budgetary pressure will entail a marked reduction in the manpower in this sector along with improved conditions for it. Everyone knows there are significant pockets of inefficiency, superfluous units and excess manpower. It is necessary to make the employment model more flexible, the way it is in the Nordic countries, for example. Efficiency must be enhanced in all parts of the sector, while giving incentives to government ministries and ministers to achieve the efficiency goals.

2. Change the fiscal rule. It is too complex, it is unclear and it acts to deepen economic crises. The rule has to be simple – 2% annual growth. It is also possible to think about a descending slope of a rule that starts at 4% in 2015 and goes down to 2% percent within two years, in order to keep the public services from crashing. If you carry out a change in the restriction right now, you will be able to pass it without losing credibility.

3. Make determined structural changes to lower the cost of living, among them a law to decrease concentration of ownership, far-reaching exposure to imports and encouragement of competition in all branches of the economy, including the ports and electricity. Once these steps are taken, the public will be able to accept the cuts that will still be required.

4. Take the wheel in the implementation of budget in real time and pay obsessive attention to every deviation from the course. Every deviation has to be corrected immediately. Any unplanned budget increase or response to an unexpected need with multi-year repercussions has to be accompanied by a cut elsewhere to balance it. Don’t let the autopilot cause you to crash!

5. Problems are never solved by postponing them. Therefore, avoid post-dated checks, wage agreements that Eini loves so much and increased multi-year commitments. All these are ticking time bombs.

6. Deal creatively with private members’ bills that increase the budget. It is possible to think about a covenant with the Knesset in which the legislature takes responsibility and prevents a budgetary crash, like the one we’ve had, by means of reining in private members' bills.

7. Finally, coordinate expectations with the public. The huge outcry we’ve been hearing recently stems from the incomprehensible gap between your optimistic declarations and the budget crisis. Therefore, you must not scatter promises about distribution of resources you don’t have and you won’t have two years from now. The budget challenge will continue to be with you but if you deal with it wisely now, don’t postpone things and stop handing out post-dated checks, you will be able to prevent the next crash and pass a budget that reflects the order of priorities you set.

The author is the former director general of the Finance Ministry.

Emil Salman