The Two-Year Budget: A Bad Idea Whose Time Has Come?

Despite widespread opposition from financial experts and senior politicians, Israeli Prime Minister Binyamin Netanyahu’s two-year budget plan will probably be adopted, Globes reported on Tuesday.

Senior Ministry of Finance officials will apparently give the prime minister what he wants, despite misgivings. And that includes budget director Amir Levy, who will not resign over the issue, despite urgings from some politicians that he do so after publicly declaring his opposition to a multiple-year budget.

Finance Minister Moshe Kahlon is likewise expected to go along, to placate Netanyahu’s desire to skip the annual budgetary turmoil, though he has said repeatedly that a two-year framework is no guarantee of political stability. Kahlon wants time for his reforms in the housing market and the banking system to yield results that he can show the voters.

While the Bank of Israel has so far taken no position, withering criticism has come from senior economists outside the government.

“This is a bad idea at a bad time,” says former Bank of Israel Research Department head and Herzliya Interdisciplinary Center Arison School of Business Prof. Rafi Melnick.

The objections to a two-year budget are several, including the uncertainty prevalent in world markets and the resultant difficulty in making long-range forecasts of GDP, tax revenues and the budget deficit.

With such imponderables in mind, Melnick points out, “no serious economist anywhere in the world supports a two-year budget.”

Ministry of Finance officials worry that economic history will repeat itself. In 2012, the state was confronted with a budget deficit double the one anticipated, which threatened to undo previous achievements in reducing the ratio of debt to GDP. The crisis was eventually resolved by drastic across-the-board budget cuts and tax hikes, almost as painful for the politicians seeking reelection as it was for the voters.

As a result of the 2012 trauma, the ministry is considering the creation of a fail-safe mechanism, a control and balance point in September or August 2017, at which time automatic balancing mechanisms will be activated in the event of significant deviations from budgetary targets.