Israel

Drafting of Israel's 2020 budget will pit economics against politics

When Israel’s new government finishes handling emergencies, it will need to start drafting a budget. The basic laws require the government to draft a budget for 2020 as quickly as possible, as the country has been operating on last year’s budget due to a lack of one for the year. Since that budget was prepared well in advance, Israel hasn’t had a budget drafted in more than two years, an unprecedented stretch.

By law, the government needs to draft a budget within 100 days of taking office, but some of Israel’s basic laws have already been significantly amended by the current government, and it’s not unthinkable that the budget laws could be amended as well.

However, before it changes any laws, the government will need to decide how to formulate the budget – whether to pass separate budgets for 2020 and 2021, or to pass them together.

In a press conference last Thursday, Prime Minister Benjamin Netanyahu said he still hadn’t decided which format to choose.

Behind his deliberation is an economic debate over whether Israel should commit now to its expenditures through the end of next year, even if the budget makes allowances for the use of special reserves or other ways of meeting expenses, given unforeseen economic changes. And yet, the economic debate is being dwarfed by political considerations.

Growth.

Clause 30 of the coalition agreement between Likud and Kahol Lavan states that the coalition will pass a two-year budget within 90 days, and that the budget for 2021 will be updated at the beginning of the year, at which time a budget for 2022 will be passed as well.

Kahol Lavan and Labor preferred this formulation, because passing the 2020 budget on its own could catch them into a trap. Under one interpretation of the coalition agreement, a failure to pass the 2021 budget would not be considered a violation of the coalition deal that would have the prime minister’s seat handed off to Kahol Lavan leader Benny Gantz. Kahol Lavan fears a scenario where the 2020 budget is passed immediately, and then the 2021 budget doesn’t pass, pushing the entire Knesset to disband and sending the country to elections. Until the elections, and perhaps even afterwards, Netanyahu will remain prime minister, and the rotation with Gantz would never be implemented.

This scenario may be driving Netanyahu to seek to pass the 2020 budget on its own. And yet, he may also see benefits in passing a two-year budget, such as cutting short the endless budget debates and all the political extortion that goes with them. In any case, the choice will be not just economic, but also political and perhaps also legal - and the considerations may change rapidly along with the political opinion polls.

The Bank of Israel avoids political conflicts. And yet, it warned Netanyahu and Finance Minister Israel Katz from setting an inflexible budget for 2021, given the high degree of economic uncertainty as Israel contends with the coronavirus crisis. Few dare to predict how the country’s economy will look even within the next few weeks, and no one knows how many people are currently unemployed, how many will be left without a stable job once the pandemic subsides, or whether a second wave of infections will change the picture again.

The Bank of Israel particularly fears that Israel will start tightening its fiscal policy too soon. The crisis sent Israel’s budget deficit skyrocketing – the deficit for the past 12 months is already at 6% of GDP, and it’s expected to continue growing. At some point, the government will need to start cutting it, but when? Cutting budgets and salaries, or raising taxes, could hurt economic recovery.

On the other side of the debate are those who seek to emphasize the importance of showing fiscal restraint now, even if some measures will only be implemented later on. They argue that it is best to do so now, when the economy is still in crisis mode and the government still has to political capital to make cutbacks. Should the debate on cutbacks be pushed off to 2021, the economic winds may have shifted.

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