Panel Urges Switch to Biennial Budgets

Israel should switch from annual to biennial budgets, according to the recommendations of a subcommittee of the Megidor Committee, which is preparing proposals to reform Israel's governmental structure.

An annual budget, wrote the subcommittee, "encourages short-term vision, or at least causes a preference for short-term goals." It also results in "uncertainty and inefficiency in implementing long-term projects, especially in the field of infrastructure," and it "encourages inefficient use of the budgets that are approved," because ministries fear that if they do not use the funds allocated to them, the money will be taken away. They therefore frequently spend their budgets on less important short-term goals rather than investing in multiyear projects that could result in a surplus at the end of one particular year.

Subcommittee chair Ya'akov Lifshitz argued that a two-year budget would provide an appropriate compromise between the need for long-term planning and the need for flexibility in the face of changing economic circumstances.

The subcommittee also recommended various measures aimed at decreasing the Finance Ministry's almost total control over the budgetary process and increasing the influence of the other ministries and the Knesset.

According to a recent study by the Organization for Economic Cooperation and Development (OECD) and the World Bank, Israel has the second most centralized budgetary process among the 25 developed nations surveyed, giving it a grade of 8.3, compared to an average of 5.6. And in terms of the Finance Ministry's domination of the process, Israel was in first place, with a grade of almost 10, compared to an average of less than 5.

Moreover, a study by former Finance Ministry director general Avi Ben-Bassat and economist Momi Dahan, which was published recently by the Israel Democracy Institute, found that this centralization often results in the process being on "automatic pilot," meaning that each budget is basically the same as that of the previous year, with minor variations. This, they said, is due in large part to the fact that individual ministries lack the power to propose major budgetary changes in their own areas of expertise.

According to Lifshitz, the treasury's domination of the process stems largely from the fact that none of the other bodies involved - the cabinet, the Knesset and the other ministries - have sufficient time to give the budget serious study. The cabinet and the ministers generally have two months to approve the budget, he noted, while another two months are allotted the Knesset. "I don't think that Israel has such great geniuses that they can master the budget in two months," Lifshitz said. "The amount of time available at each stage of the process of preparing and approving the budget is insufficient to allow thorough, comprehensive and professional discussions."

Making the budget biennial instead of annual would therefore also help to solve this problem, he argued: It would enable the process of preparing and approving the budget to be lengthened, giving both the ministries and the Knesset more time to seriously study the budget and make appropriate changes. It would also reduce the amount of political wrangling, since the budget negotiations would take place only every two years instead of every year.

As another way of increasing ministries' control over their own budgets, the subcommittee also recommended sharply reducing the number of major headings into which the budget is divided. A typical Israeli budget contains more than 8,000 major headings (not including the defense budget, which is classified), compared to only about 700 in countries such as Holland and Denmark. And since transferring funds from one major heading to another requires the approval of the treasury, and sometimes the Knesset Finance Committee as well, this greatly reduces a ministry's ability to transfer funds from one area of activity to another.

"The treasury claims that the ministries are staffed by irresponsible people," Lifshitz said. "But if you don't give them responsibility, then they cannot be responsible."