Why Israel’s two-year budget cycle matters

Thinking about budgets – which should be an overarching strategic framework that demonstrates an entity’s priorities – in 365-day increments, leads to a disproportionate ratio of planning versus executing. This schedule also cultivates a thought process that, by design, cannot look sufficiently into the future. It is foolhardy to think that the way entities thought about budgets in the 1920s – when the budget, as it looks today, was first popularized in the commercial world – is the way they should think about them nearly a century later. As industries and thinking evolves, so should budget planning.

{mosads}Which is why Israel’s Finance Ministry initiative in 2009 to go to a two-year budget is so important. Given the four years of the Israeli government functioning with multi-year budgets, we are able to glean a number of lessons:

On the most fundamental level, the amount of time spent on lower value-added activities that are budget-planning related is dramatically reduced. Instead of spending anywhere from two-six months every year on budget planning, some marginal incremental time can be spent and amortized over a two year period. This frees up time for other, more productive activities.

In terms of real-world politics, it also leaves the country less exposed to the machinations inherent in any budget process. While the next budget that is passed by any world leader that is exactly in line with his or her vision will be the first, the painful, sometimes coalition-destroying budgeting process takes place with half the frequency when it’s done every two years. Do not underestimate the value of ensuring that these adversarial, confrontational discussions have been reduced in their frequency by 50%. When people think of Israel’s parliamentary system, one of the first images that comes to mind is how splintered it is. In actuality, however, it has been exceptionally stable over the past few years. While part of this is undoubtedly due to shifting politics in the Israeli electorate, an under-appreciated enabler is the two-year budget.

But perhaps most important, a two-year budget enables the State of Israel to take a longer-term view and to think more strategically. While certain European Union countries are forced to take weekly “stress tests” on their budgets, and other countries struggle to look more than a month into the future, Israel has been able to keep its head above water and its eyes focused on the future, because of the multi-year view enacted into its budgeting processes.

Perhaps the most explicit example of this benefit took place during Israel’s social protest in the summer of 2011. The Finance Ministry was able to address – if not in a way that satisfied everyone – the entirety of issues raised by the social movement with an all-encompassing, calculated approach. The Ministry was able to address the core issues of overall government spending, allowing it to adopt certain policies while rejecting others not aligned with the overarching vision and long term view.

There are drawbacks to a multi-year budget. The most obvious is the accuracy of the forecasts; the longer out you look, the more likely that the assumptions underlying the budget (GDP growth, tax revenues, etc.) will be flawed. A counter to that point is that the accuracy of the underlying assumptions are rarely on target anyway, and the extra runway that a two-year budget provides, gives more time to adjust as needed.

When a friend of mine was asked to head the budget at a major U.S. government entity, he told the then-Secretary that he was a “policy” guy, not a finance guy. The Secretary’s response was that “the budget is the policy.” It is in our best interest to ensure that our budgets, and our policies, are afforded the most strategic lens possible, while minimizing potential disruptions. This can best be achieved by ensuring that the two-year budget remains a permanent fixture in our political landscape.

Groner is Israel’s Minister for Economic Affairs to the United States.