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Israel’s Social Protest and the Two-Year Budget Cycle: Any Lessons?

In my recent last post I discussed the social protests in Israel and Israel’s balanced budget legislation.  Although a popular protest, it was undoubtedly controversial.  Some question whether the protesters’ call for “social justice” is directed at the middle class instead of promoting the interests of the “weaker populations,” especially those residing outside of metropolitan Tel Aviv.  In response to the protests, Israel’s Prime Minister appointed the Committee for Socio-Economic Change.  The Committee is expected to issue recommendations by the start of the upcoming Jewish holidays before the end of September.  These recommendations will likely suggest shifts in governmental expenditures within the budget, based on the fiscal rule that caps spending and deficits.

In discussing changes in the budget one must consider an important piece of legislation.  The Basic Law: State Budget for the Years 2009 and 2010 (Special Provisions) (Temporary Application) (Amendment) extended the temporary deviation from the annual budget requirement by permitting a bi-yearly budget for 2011 and 2012.

The International Monetary Fund (IMF) noted in its January 24, 2011 Public Information Notice that Israel’s bi-yearly budget was one of the fundamentals that “allowed Israel to pass through the global recession relatively unscathed” by “help[ing] to stabilize expectations in mid-crisis and establish[ing] an important precedent for the future.”

The Knesset (Israeli Parliament) Information and Research Center (KIRC) has extensively studied the pros and cons of bi-yearly budgets.  KIRC’s Budgetary Control Department issued a memorandum on January 17, 2010 on this topic.  The memorandum stated that one of the disadvantages of a bi-yearly budget was “the discrepancy between the budgetary policy and changes in the world and domestic economic environment.”  It cited the findings of an earlier KIRC’s comparative study issued on October 19, 2009, which found that the very few countries that had implemented a by-yearly budget did so “due to a political crisis and not to economic justifications.”

The Israeli Supreme Court reviewed the constitutionality of the temporary extension of the bi-yearly budget in H.C. 4908/10 Knesset Member Bar-On v. Israel’s Knesset.  Among other arguments, petitioners claimed that adoption of the Amendment violated the constitutional balance of power between the legislative branch and the executive branch.  They argued that the Amendment deprived the legislature from the essential ability to review the governmental activities and priorities on a yearly basis.  In rejecting the petitioners’ claim, the Supreme Court held that although the Knesset review of governmental activities is a central component of the principle of separation of powers, requiring a bi-yearly instead of yearly review did not amount to harm of the regime’s basic principles that would justify nullification of the basic law.

Although the temporary requirement of a bi-yearly budget has not been repealed, its further extension is subject to debate.  In an article published by Globes, a leading Israeli business magazine, the author opined that

flexibility is the name of the game, and the biennial budget, which handcuffs decision-makers, worsens the problem. …  We are not yet half way through the biennial budget, and it is already clear that it is irrelevant.  The combination of the Arab Spring, which has worsened the security threat; the deteriorating global economic climate; and the social protest have overthrown the basic assumptions of the biennial budget.  The macroeconomic figures that were the cornerstone of the budget plan and the numbers derived from them no longer exist.

Whether the bi-yearly budget authorization will be extended beyond 2012 is a matter for the Knesset to determine in view of global, regional, and local developments.  I will be following these developments and reporting on future Knesset actions.

Update: This was originally published as a guest post by Ruth Levush. The author information has been updated to reflect that Ruth is now an In Custodia Legis blogger.

 

6 Comments

  1. Marcelo Rodriguez-Escribano
    September 14, 2011 at 5:52 pm

    Very informative article, Ruth! I wonder how much the bi-yearly budget policy in Israel has anything to do with the recurrent early elections and the sometimes intricate coalition building process after the results. Toda, M

  2. Ruth Levush
    September 15, 2011 at 10:23 am

    Dear Marcelo:

    The Knesset initially passed the bi-yearly budget authorization law on April 7, 2007, merely seven days after the convening of Netanyahu’s coalition government. According to explanatory notes of the Bill the law was designed to protect the Israeli economy from the impact of the world economic crisis by providing certainty and stability. The extension of the temporary provision for 2011-2012 was proposed based on the successful experience gained in 2009-2010. Explanatory notes of the extension bill state that it was designed to provide further experience to evaluate if the bi-yearly budget should become a permanent provision. The system, therefore, seems to be based more on economic evaluations rather than on Israeli domestic politics.

    Gracias,

    Ruth

  3. David Lachmann
    September 15, 2011 at 3:19 pm

    Outstanding and very timely for our budget debates. Thank you.

    Is the budget discussed in this article more like our budget resolution, budget authority, or an appropriation?

    How much flexibility does the Knesset have to modify the budget once the bi-yearly budget is enacted? Do they have the ability, as we do here in Congress, to go back and adopt a supplemental appropriation or rescission, or to make other modifications to meet exigencies over the two-year period?

  4. Ruth Levush
    September 15, 2011 at 5:48 pm

    Dear David:

    Q. 1: Is the budget discussed in this article more like our budget resolution, budget authority, or an appropriation?

    A.: It seems to me that the Israeli law that provides a temporary deviation from the annual budget requirement by permitting a bi-yearly budget for 2010-2010 and its extension for 2011 and 2012 is more similar to an appropriation law in the US. In Israel, however, unlike in the US, the appropriation law is for the whole economy, not for pieces of the budget. See http://www.knesset.gov.il/Laws/Data/law/2282/2282.pdf . In that sense it is different from the US. Unlike a budget resolution in the US, the Israeli authorization to deviate from the requirement of an annual budget has the teeth of law.

    Q.2: How much flexibility does the Knesset have to modify the budget once the bi-yearly budget is enacted? Do they have the ability, as we do here in Congress, to go back and adopt a supplemental appropriation or rescission, or to make other modifications to meet exigencies over the two-year period?

    A.: The temporary provisions discussed in this blog specifically authorize deviation from the requirement for a one year budget contained in Basic Law: The State Economy. The Basic law itself provides that the Knesset can modify it in case of “necessity.” The Basic Law, however, also provides that “[w]here it appears to the Government that the Budget Law will not be adopted before the beginning of the financial year, it may bring in an Interim Budget Bill,” similar, I guess, to a US continuing resolution.
    In addition, in 2004 the Israeli Supreme Court held (H.C. 2725/02 General Health Services v. State of Israel) that a yearly budget deficit does not exempt the government from meeting its financial obligations.
    If the Knesset is authorized to modify an annual budget appropriation law, it seems to me that it clearly has the authority to modify a bi-yearly budget.
    I am expecting to meet with high ranking Knesset experts on Israeli finance law next week and will report further information on these and other related issues following this meeting. If you have any additional questions let me know.

    Glad this piece is timely and useful.

    Ruth

  5. David Yuravlivker
    September 16, 2011 at 1:06 pm

    Ruth,
    thanks for a very informative and timely note. Just one comment: Prof Manuel Trajtemberg, head of the Committe for Socio-economic Change, made the point that staying within the budget is not only important for maintaining macroeconomic balance but also because it illustrates that there are trade-offs, i.e., if you want to increase one type of expenditure, you have to decrease another. Thus, it would force the political system to make tough choices and be selective in order to increase social spending and meet the protesters’ demands.

  6. Ruth Levush
    September 20, 2011 at 4:01 pm

    Dear Marcelo:

    In your September 14 comment you asked how much the bi-yearly budget policy in Israel has anything to do with the recurrent early elections and the sometimes intricate coalition building process after the results.
    Indeed, according to the explanatory notes of the Bill the law was initially designed to protect the Israeli economy from the impact of the world economic crisis by providing certainty and stability. Having thought more about your question I think that it is quite possible that budget stability as a way to protect the stability of the government, cannot be ruled out as an added motivation for this law.

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