The Balance of Power in the Budgeting Process
- Written By: Avi Ben-Bassat, Momi Dahan
- Publication Date:
- Cover Type: Softcover | Hebrew
- Number Of Pages: 228 Pages
- Price: 65 NIS
An in-depth exploration of the degree of transparency in the processes that determine the state budget and an evaluation of their relationship with the order of priorities of Israeli society.
The budgeting process in Israel is unusually centralized, in all of its stages. This can be seen from an analysis of the decision-making process in Israel, especially in regard to the role of every institution in the budgeting process. At the stage of preparing the budget and summarizing the government's position, Israel chose to grant strategic power to the Minister of Finance and the Prime Minister, rather than full cooperation with the spending ministers (the cooperative model). These decisions contribute greatly to preserving ﬁscal discipline, but they exact a price. The almost exclusion of the spending ministries, in which much knowledge and expertise are concentrated, is likely to impair the desired public priorities and the efﬁciency of public services.
At the legislative stage, the government has preferential power over the members of the Knesset, and in the execution stage the Finance Ministry was allocated the power needed in the centralized model in order to ensure that the implementation of the budget ('with all its amendments') does not deviate from the budget approved by the Knesset.
The choice of the centralized process began after the stability program (1985), following the budget crisis during the years of the 'lost decade' (1974-1985). In this period public spending reached 77% of the GDP, and the deﬁcit in the budget amounted to 14% of the GDP. The repercussions of this policy on the rate of inﬂation and growth were destructive. As a result of the 'lost decade,' there was a shift to a more market-oriented view and ﬁscal discipline. The proportion of government expenditures in the GDP decreased slowly and today amounts to only 49%. The deﬁcit in the budget of the public sector in general also decreased signiﬁcantly, to an average level of 4% of the GNP during 1989-2004. These impressive results would not have occurred had the two main political parties not internalized the necessity of responsible budgetary management. The current levels of public expenditures and deﬁcit allow us to re-evaluate whether such a high level of centralization is still necessary for planning and implementing the state budget.
Another serious problem is the low level of transparency in the budgeting process. The central problem focuses on the most important stage – the deliberations in the government. For a discussion on the composition of the budget, the government receives the most meager data, which are not sufﬁcient for rational decisions making. The data resting on the Knesset table are inestimably detailed. The dearth of material submitted to ministers during the preparation stage, and the short time allotted to them to shape their positions may harm the efﬁciency of public services allocation because the bulk of the knowledge and the expertise are located in the ministries.
The book presents additional important issues which have bearing on the efﬁciency in supplying public services, the possibilities for achieving budgetary discipline, and the reﬂection of societal priorities. Many countries in the western world equivocate concerning the desired solution to these issues. An issue that constantly arises in Israeli public debate is whether to move from an annual budget framework to a multi-year budgeting. An additional issue that is examined in the book are the advantages and disadvantages of moving from inputs (line items) to results oriented budgeting. There are countries that have moved over, at least partially, to budget management according to results, i.e., the planning of the budget according to goals.
In the book we presented theoretical background regarding the issues involved in the budgetary process. We analyzed the Israeli experience and we made a comparison between the rules used in the budgetary process in Israel, and those used in the OECD countries.
Because of the great importance inherent in maintaining ﬁscal discipline, especially in light of the high inﬂation experience that Israel underwent in the past, the centralized process for reaching decisions should be preferred. This choice is in accordance with budgeting process in most of the OECD countries.
At the preparatory stage of the budget, it is desirable to leave in place the strategic power of the Finance Minister and Prime Minister, in relation to the executive ministers. But it is desirable to integrate into this model cooperative element, as is done in most of the OECD countries. The advantageous use of the information that the executive ministries have regarding the public's demands and the production function of the services they control, may improve the efﬁciency of public services allocation and production.
The formula for a centralized model in which there are cooperative elements, is the division of the process of decision-making in the government into two stages. Expenditure, taxes and deﬁcit will be determined in the ﬁrst stage. In this stage the Prime Minister and Finance Minister will be granted preferred status in the decision-making process, according to the arrangement in place today. After the expenditure and deﬁcit are determined, a decision will be made as to the composition of the budget, through a system that will increase the involvement of the spending ministers in determining its composition. A division of the process into two stages, together with a change in the balance of power between its players, will allow for the attainment of budgetary discipline, together with higher chances of reﬂecting better public priorities and may contribute to more efﬁcient public services.
The implementation of the latter recommendation also requires organizational changes in the government ministries. Since the 1980s, the stronger the position of the Finance Ministry became, the weaker the positions of the spending ministries became. As a result, their ability to attract top-rate personnel declined. The political instability in the past decade has decreased further the ability of the spending ministries to attract high quality ofﬁcials. The suggested change in the balance of power may attract those people to come to spending ministries. This process will take place gradually, together with the expansion of their authority. The expansion of authority must come at the same time as the granting of responsibility to the ministries for providing the services they are responsible for.
The Knesset's authority for approving the Budget Law and the limitations on private legislation are consistent with a centralized budget process, and are similar to that is common in most of the OECD countries. Nonetheless, it is important to improve and strengthen the supervision role of the Knesset.
A. Balance of Power in the Budgeting Process
1. Government Deliberations
- A series of discussions in the government on the budget will begin on April 1 and end on the eve of the Jewish New Year.
- The material for each of the budget discussions will be given to the participants at least two weeks in advance.
- The ﬁrst discussion in the government: the Finance Minister and selected executive ministers will present the government with an input-output analysis of the current year in their ministries.
- Following this discussion, a meeting of the Committee of Ministers for the Economy will be held, in which the Finance Minister and the Economic Advisor to the Government will present their suggestions budget priorities (at the level of clusters) for the coming year.
- The discussion about the order of priorities must be in line with the ﬁscal rules that the government had decided on (see the details in Section 3 below: The Order of Fiscal Goals in Israel).
- The second discussion in the government: a vote on the recommendation of the Finance Minister as to the order of priorities at the level of clusters (such as education, health, welfare and security).
- The third discussion in the government: the Economic Advisor to the Government will present the government with a macroeconomic report and growth forecast. The government decides to establish a ‘Department of the Economic Advisor to the Government’ in the ofﬁce of the Prime Minister (for details, see the Appendix, ‘The Economic Advisor to the Government’). Until the establishment of this department, the Research Division of the Bank of Israel will fulﬁll this above function.
- A fourth discussion in the government: the Finance Minister will submit to the government a draft budget, according to the government ministries. The Economic Advisor to the Government will submit his opinion to the government about the Treasury’s proposal. At the end of the discussion the government will take a vote on the Finance Minister’s proposal.
- The State Budget will be laid before the Knesset no later than the end of October.
- The non-approval of the State Budget by the end of December will lead to the immediate dissolution of the Knesset and new elections.
2. Preparing the Budget
- After the second discussion, the Finance Minister will set the ceilings for expenditures for the government ministries and will request proposals and an analysis of new programs.
- The Finance Ministry will include the ministries in preparing the transitional pages for the next budget year. A summary of the transitional pages of every budgetary section – i.e., changes dictated in the various budget sections due to population growth, legislation, binding agreements, government decisions and budget agreements – will be signed by the person responsible for that budgetary section in the relevant ministry, and by the deputy responsible for budgets.
- If the parties do not reach an agreement about the summary of transitional pages, the disagreement will be brought for decision to the director of the ministry and the person responsible for budgets. In the absence of agreement between them, the amount of the transitional pages will be determined by the Finance Minister, after he takes counsel from the minister responsible for the budgetary item.
- The expenditure sections under the responsibility of the Finance Minister and the income sections will be handled by the Economic Advisor to the Government, rather than the Director of the Ministry. Until the establishment of the Department of the Economic Advisor to the Government, the Director of the Department of Research in the Bank of Israel will handle this, instead of the Director of the Ministry, and the Governor of the Bank of Israel instead of the minister responsible for the budget item.
- Every executive ministry will establish a Budget Unit whose function will be to build a budget proposal. The resources for the establishment of this unit will come from the budget of the executive ministry.
- The Finance Ministry and the relevant ministry will submit proposals for changes (additions and subtractions) in each of the executive ministries, subject to the ceiling for expenditures that had been set.
- A mechanism will be established for bi-lateral negotiation between the spending ministry and the Finance Ministry in all levels of management. Controversial issues will be submitted for bi-lateral negotiation between the Finance Minister and the spending minister.
- The discussion between the spending ministries and the Finance Minister will continue at least one month.
3. Gradual Decrease in Line Items
- Every budgetary item (of at least two digits level) will be divided into areas of activity (at the level of 4 digits), according to the expenditure goals, as determined jointly by the Finance Ministry and the relevant ministry.
- Every area of activity will be divided into plans for implementation (at the level of 6 digits), according to the economic classiﬁcation of the expenditure: wages, purchases, support payments, transitional payments, investments, participation, reserve for cost increases – as determined jointly by the Finance Minister and the relevant ministry.
- Every executive plan will be detailed at a level known today as Regulations (at the level of 8 digits), as determined solely by the relevant ministry. The detailed work plan will be available to the public through the internet site of each ministry.
- A budgetary transfer between sections, between areas of activity and between programs, will require the approval of the Finance Ministry, as is done today, and in cases in which the law determines – the approval of the Finance Committee of the Knesset as well. The Finance Ministry must provide a detailed, written justiﬁcation if it does not approve a budgetary transfer from section to section, between areas of activity and between programs. The minister responsible for the budgetary section may bring the disagreement to the Prime Minister for decision.
- A budgetary transfer from regulation line to regulation line will be done by the relevant ministry, with a report to the ministry comptroller. In unusual situations the ministry comptroller will be authorized to make the implementation of the change conditional on the approval of the Finance Minister. The Finance Minister may not delegate his authority to forbid the implementation of such changes by the ministry.
- The budget at the level of detail of regulation lines will be made available to the public on the internet site of the speciﬁed ministry. The implementation of the past budget, at the level of detail of regulation lines, will be presented to the public on the internet site of the speciﬁed ministry.
- The number of programs must be decreased gradually over ﬁve years. The number of programs should not be more than 500 after ﬁve years from the date of the implementation of the reform.
B. Should the Law of Arrangements be Abolished?
- To allow the use of the Law of Arrangements only during an economic crisis. An economic crisis is deﬁned as an expected reduction in the per capita GNP in the next budget year.
- In any event, even during a crisis, the Law of Arrangements will not include proposals that are not of any direct budgetary importance.
C. Fiscal Rules in Israel
- To determine the target for the growth in real expenditures (minus interest) for a limited number of years. The target will be subject to the budgetary deﬁcit ceiling, at the rate of 3% of the GNP.
- In countries with a coalition system, such as Denmark and Netherlands, the ﬁscal rules for expenditure, deﬁcit and debt were anchored in the coalition agreement signed immediately after the elections, even before the formation of the government. The agreement determines the framework for the budget elements through the entire term. The government decides to consider a framework that will, at the beginning of the term of ofﬁce, outline a program for the development of the budget elements during its term.
a. A Department of the Economic Advisor to the Government will be established in the Prime Minister’s ofﬁce, headed by the Economic Advisor to the Government. Part of its functions will contribute to the improvement in transparency in conducting economic policy (for details of its functions and authority, see section 8 of the Recommendations: The Economic Advisor to the Government).
b. Every recommendation that the Finance Ministry initiates and submits to the government must be accompanied by a presentation of the expected budgetary cost or saving.
c. In the presentation of the budget documents, a distinction will be made between existing programs and new programs.
d. The Finance Ministry will submit to the government, in advance of the third discussion, the group of tables that always appear in the book of the Main Points of the Budget, in the same format and according to the same level of detail that is submitted to the Knesset, but with the addition of the following change: The columns in the table of the budget proposal will include the actual budget for the previous year, the original budget for the previous year, a budget of changes for the previous year, an estimate concerning implementation in the current year, and a budget proposal for the coming year.
Below is a list of the Tables which must be presented to the government:
- Budget Proposal for the Fiscal Year.
- Forecast of State Revenues and Loans for the Fiscal Year.
- Estimated tax beneﬁts for the Fiscal Year.
- Draft Budget for Fiscal Year: Business Enterprises.
- The Budget Deﬁcit and its Financing for the Fiscal Year, in addition to an estimate for the implementation of the budget for the current year and the implementation of the budget for the previous year. The detail in the Table should be such that it is possible to calculate the deﬁcit based on the sections appearing in the Table itself.
- Gross Expenditure by Economic Classiﬁcation for the Fiscal Year, in addition to an estimate for the implementation of the budget for the current year and the implementation of the budget for the previous year. Revenues and Loans for the Fiscal Year, in addition to the estimate for the implementation of the budget during the current year and the implementation of the budget for the previous year.
- Peak in the Labor Force or the Fiscal Y year, in addition to an estimate for the implementation of the budget for the current year and the implementation of the budget for the previous year.
- Gross Expenditure according to the spending ministries for the ﬁscal year, in addition to the estimate for the implementation of the budget for the current year and the implementation of the budget in the previous year.
- Net Expenditure according to the spending ministries for the budget year, in addition to the estimate for the implementation of the budget for the current year and the implementation of the budget in the previous year.
- Debt Payments for the Fiscal Year, in addition to an estimate for the implementation of the budget for the current year, and the implementation of the budget during the previous year.
- Interest Payments for the Fiscal Year, in addition to an estimate for the implementation of the budget for the current year, and the implementation of the budget during the previous year.
e. The explanatory notes accompanying the Tables in the blue books submitted to the Knesset will be submitted in a uniform format for all government ministries. The explanatory notes will include an analysis of the results achieved in the areas of activity of the relevant ministry, in comparison with the goals set in previous years. Extensive space should be devoted to a description of the purposes of the new expenditures.
f. The Finance Ministry will publicize quarterly, to the government and the public, all the agreements reached during the course of the year between employees of the budget department and the executive ministries concerning the expenditures of the ministries (‘deﬁnite budgetary agreements’).
g. The monthly implementation of the government budget during the previous month will be publicized by government ministries (and not by clusters, as is the norm today).
E. Should We Move to Multi-Year Budgeting?
- Not to move to a multi-year budget
- To cancel the multi-year budget in its present format.
- In its stead, to draw up two forecasts (realistic and cautious) of the main ﬁscal variables for the next ﬁve years. These forecasts will be drawn up by the Economic Advisor to the Government, and will be submitted to the government, together with the State Budget.
- In countries with a coalition system, such as Denmark and Netherlands, the ﬁscal rules for expenditures, deﬁcit and debt are anchored in the coalition agreement signed immediately after the elections and even before the formation of the government. This agreement sets the guidelines for budget aggregates throughout the entire government term. Consideration of a format is recommended that will outline, at the beginning of the term, a plan for developing budget aggregates during the term.
- To improve the rules concerning the transfer of surpluses from year to year, and to anchor the new rules in the Basic Law of the Budget.
- To determine the deﬁnition of the required surplus in the Basic Law of the Budget.
- To set in the Basic Law for the Budget the date for the transfer of surpluses to the executive ministries.
- To cancel the reserve sections in the sections of the executive ministries that are not intended for general reserve or for price rises.
F. Should We Move to an Accrual Basis?
Not to move to an accounting system for the budget on a accrual basis.
G. Should We Move to Results-Based Budgeting?
1. The Number of Budget Items
The government decides to decrease the number of budget line items according to the format formulated in Section A (Balance of Power in the Budget Process, section 3).
2. Results-Based Budgeting
- Not to move to a results-based budgeting
- To increase the importance of management according to results in the process of drawing up the budget in Israel. In every initiative for a new program or cancellation of an existing program, the initiator (the executive ministry or the Finance Ministry) will be required to prepare a well-reasoned memorandum of the policies answer the following three questions: What is the purpose of the program? How does the executive ministry intend to achieve the purpose of the program? What is the budgetary cost necessary to do so?
- To carry out an evaluation of existing programs once every few years in order to examine their efﬁciency and their need. The Economic Advisor to the Government will conduct the evaluations.
- The government can ask the Economic Advisor to the Government to receive an evaluation of the programs in the socio-economic sector.
H. The Economic Advisor to the Government
a. A department in the Prime Minister’s Ofﬁce will be set up to deal with advice in planning and economic research (hereinafter, ‘The Economic Advisor to the Government’).
b. The Economic Advisor to the Government will head of the department, and he will have an independent statutory position, like the Governor of the Bank of Israel.
c. The functions of the Economic Advisor to the Government:
- Preparation of a proposal for the order of priorities in the state budget at the level of clusters (such as education, health, welfare and security). This proposal will be discussed, together with the proposal of the Finance Ministry, in the Ministerial Committee on the Economy, in the discussion prior to the second discussion in the government.
- Preparation of the macroeconomic forecast required in the preparation of the state budget.
- Preparation of an opinion about the proposal of economic policy of the Finance Ministry in the areas of budget, taxation and structural changes. The opinion will be distributed to the ministers together with the Finance Ministry’s proposal and will be publicly publicized.
- A cost-efﬁciency evaluation of all the new budgetary item proposals, main structural changes (according to his choice or at the request of the government) and investments in infrastructure.
- Writing a booklet ‘The national budget’ that will be submitted to the government and the Knesset.
- Setting the rules for recording budgetary acts.
- Economic research in the areas of his activity.
- The government shall decide that, until the establishment of the department of the Economic Advisor to the Government, the Governor of the Bank of Israel will continue to fulﬁll the function of the economic advisor to the government, as is deﬁned in the present law of the Bank of Israel. The Research Section of the Bank of Israel will be temporarily responsible for the preparation of the macroeconomic forecasts used in the preparation of the budget.
d. The areas of activity of the Economic Advisor to the Government:
- Budget and taxation.
- Public services, such as education and health
- Labor and Welfare
- Infrastructure and Quality of the Environmental
- Economic growth, personal capital and technology
- Market structure and regulation
e. Appointment of the Economic Advisor to the Government:
- The Economic Advisor to the Government will be appointed by the government, at the recommendation of the Prime Minister, for a term of 5 years.
- The Economic Advisor to the Government will be an economist with high professional stature.
- The government may terminate the Economic Advisor to the Government according to the same criteria set forth in the law for terminating the Governor of the Bank of Israel from his position.
- The status of the Economic Advisor to the Government, its independence and his functions shall be anchored in law.
f. Employees and budget:
- The Department of the Economic Advisor to the Government will employ 15 economists, research assistants and administrative staff.
- The department will be part of the Prime Minister’s Ofﬁce, and its activities will be ﬁnanced from its budget.