Treasury agrees to two-year budget mechanism

Agreement has been reached by the director-generals of the Ministry of Finance and the Prime Minister’s Office on the mechanism for the two-year budget for 2017-2018, as per the prime minister’s demand. The mechanism, created to allay the reservations of Finance Minister Moshe Kahlon, provides the Knesset with the power to deny the approval of the second-year budget, thereby dissolving the parliament and leading to new elections. Ministry of Finance officials said such a scenario was extremely unlikely.

The agreed-upon mechanism is one of the lessons drawn from the missteps of the only two-year budget fully implemented until now – in the years 2011-2012 – as well as a numerator and the decision to leave a NIS 3.5 billion reserve for adjustments for the second budget year.

The agreement will be anchored in a special bill which will be distributed in the coming days ahead of accelerated legislation procedures. The mechanism essentially removes the last barrier posed by the professionals handling the budget and leaves the rest of the work for the political establishment, where the battle should be easily decided after Yisrael Beitenu joined the coalition.

The economists’ main concern is of a dramatic decrease in state revenue compared with the forecast on which the second year of the biennial budget is based, as occurred in 2012. In that year, the deficit was twice the expected figure – almost NIS 40 billion – which forced the government to undertake extreme measures to close the fiscal hole.

The new mechanism sets the date for estimating the potential of such a gap for 2018 much earlier, in November of 2017. If it turns out that the forecasts of the Ministry of Finance were overly conservative and revenue is higher than expected, nothing happens. But if a gap is discovered, its size will determine the course of action: if it is minor, the government can deal with the difference; but if it is significant, it must turn to the Knesset for help.