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Israel’s Balanced Budget Legislation and the Social Protest

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Due to the increased interest in the United States in a balanced budget amendment (my THOMAS search retrieved a total of forty-four House and Senate legislative items on the subject submitted in the current Congress so far), I looked into the regulation of public spending under Israeli law.  In 1992, the Knesset (Israel’s Parliament) passed the Reduction of Deficit and Limitation of Budgetary Expense Law, 5752-1992.  The Law was designed to control budgetary deficits and the ceiling for public expenditure.

The latest amendment to the law, Reduction of Deficit and Limitation of Budgetary Expense Law (Amendment No. 11) 5770-2010, was passed on May 25, 2010.  The Amendment introduced a new fiscal rule that subjects an increase in government spending in each budget year starting from 2011 to a ceiling based on a formula tying the increase in public spending to an increase in GDP.  According to the Amendment bill’s explanatory notes, the new fiscal rule is expected to contribute to economic stability and address specific challenges related to Israel’s “geo-political situation” (although the explanatory notes do not specifically define it, I assume this relates to the Arab-Israeli conflict) and to its aging population.

The explanatory notes further state that the new rule is also expected “to preserve the balance between the ability of the government to provide public services at a high quality for the welfare of the residents and minimize socio-economic gaps in the economy, as well as preserve the reduction in the tax burden that contributes to an increase in the competitiveness of the Israeli economy” (my translation from the Hebrew).

The newly issued fiscal rule capping spending and deficits has been noted by the International Monetary Fund (IMF) in a Public Information Notice it issued on January 24, 2011, as one of the key positive steps that contributed to Israel being only “mildly affected by the global recession.”  The IMF notice follows a similar assessment by the Organization for Economic Cooperation and Development (OECD) published in 2009.

A study presented by the Knesset Center for Research and Information (Israel’s equivalent of the Congressional Research Service) prepared before the passage of the Amendment, however, raised some concerns regarding the implementation of the new fiscal rule, including the possibility of rising inflation.

Recent public protests in Israel prompted by rising costs have resulted in the appointment by Prime Minister Binyamin Netanyahu of a Ministerial committee chaired by Prof. Manuel Trajtenberg, who chairs the Higher Education Council’s Planning and Budgeting Committee.  The Committee, titled “The Committee for Socio-Economic Change,”  is tasked with examining the protesters’ demands for “social justice” and is expected to submit proposals for socio-economic reform to the government by the start of the upcoming Jewish holidays in September 2011.   The Committee has established a website (and yes—a blog!) through which it solicits proposals and comments from the public “to facilitate communications between the protesters and the governmental committee and bring about a real change in Israel” (my translation).

Media reports indicate that the Committee will review proposals for “a reduction of at least 2% in Value Added Tax, a sharp reduction in import and purchase taxes, accelerated assistance for day care, and a partial tax deduction for expenses related to raising children.”  The benefits would be paid for by putting a hold on a planned reduction in corporate taxes, instituting a salary cap for highly paid government workers, higher taxes for big earners, and a cut in the military budget.  Other proposals said to have already been considered by the Committee include the adoption of a welfare reform that would increase services to the elderly by increasing the national health tax paid by all Israeli residents from 5% to 5.5%.

The Committee’s Chair, Prof. Trajtenberg, had expressed his view that Israel’s trustworthy macroeconomic policy has allowed Israel to come out of the recent global recession unscathed relative to other industrialized nations.  Trajtenberg, therefore, publicly rejected demands made by representatives of the social protest to temporarily raise the expenditure ceiling in order to fund their demands to lower housing and food costs, among others.  In his opinion, contrary to the protesters’ position, any new government spending commitments will have to be set against existing ones.

Many Israelis anxiously await the Committee’s recommendations with the hope that such recommendations, if adopted, will alleviate their economic hardship.  Considering the mandate of the Committee to bring about “socio-economic change,” and considering the current legal requirements of tying any increase in public spending to an increase in GDP, the Committee will have to be resourceful in finding a balance between sometimes conflicting economic and social interests.

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.

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