The Bank of Israel’s position on the two-year budget
There are economic, political and parliamentary aspects to the two-year budget, but from the perspective of conducting economic policy it is not a cardinal issue.
There are economic, political and parliamentary aspects to the two-year budget, but from the perspective of conducting economic policy it is not a cardinal issue. A two-year budget is liable to make it difficult for the government to respond to unexpected changes in conditions, but the risks can be reduced by allocation of a larger internal reserve, greater flexibility in the budget, and strict use of the numerator.
The most important thing in building the budget, certainly when it has a longer term horizon, is that the budget focuses now on the long term challenges. It is important that the two-year budget allocate resources at a scope that is appropriate for achieving the government’s goals, including support of growth drivers, and physical and human capital infrastructures. The longer the budget’s horizon, the more important it is that it focuses on dealing with the state’s long term challenges.
If the government and the Knesset choose to adopt a two-year budget, it is very important to avoid the problems we have seen in the past with such a budget, particularly an accumulation of budgetary commitments that over time become harder to include. This problem can be overcome by strict use of the numerator, which has begun to operate and will help ensure that the government only commits to long term expenditures for which there are sources, within the framework of the fiscal aggregates that were defined.
As the government budget operates subject to multiyear deficit targets set in law, as the revenue-projection ability for two years is lower than for one year, and mainly because deviations from forecasts can accumulate over time, a two-year budget requires the allocation of a larger reserve than an annual budget. The expenditure of the reserve can be avoided should revenues be lower than forecast. Such a reserve also allows dealing efficiently with unexpected expenditure needs that will almost certainly arise during the course of the budget’s implementation, as occurred in the beginning of 2012. On the revenues side, to the extent that a marked deviation develops in tax revenues relative to the forecast, there will be room to examine changes in tax rates as well, should that be necessary.
The State budget incorporates many items (amendments) compared with what is generally accepted in other advanced economies. That is, budgeting is at a much higher level of detail, and small changes in its composition require authorization of the Ministry of Finance and the Knesset. This feature of the budget helps to prevent deviations from budget frameworks and strengthens the parliamentary supervision over government activity, but reduces the maneuvering room of the budgeted entities. The longer the time frame covered by the budget, during which needs will arise that are unforeseeable at this time, the more important it is to increase the flexibility in managing the budget by markedly reducing the number of amendments.