The next elections will be held on March 24th. It will be the fourth election in the past 2 years, since April 2019, and there is no guaranty that a fifth will not be needed. Since the government called an election without succeeding to pass a new budget, an unprecedented event will occur: Israel will have to function two years in a row with an interim budget.

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How will this affect the political, economic and social reality of a state struggling under its third lockdown? It’s hard to say. What is clear is that renewed political uncertainty, combined with government’s paralysis around the budget, will only hinder the country’s ability to deal with difficult and constantly-changing challenges the pandemic brings.

How can the government function without a budget?
As in many parliamentary systems, Israel has a special provision to prevent a government shutdown even in the case of a fiscal year beginning without an approved budget. The provision is known as an “interim budget,” and went into effect automatically on the first of January.

The interim budget freezes fiscal policy the way it was when the last elected government approved a budget. This means that the last approved budget, usually last year’s, is divided into 12, and distributed evenly over the months of the year. Each month, the interim government is allowed to spend 1/12 of last year’s budget.

The interim budget also restricts the government’s ability to change fiscal priorities.

All of this means that interim budgets are always somewhat smaller than regular, approved budgets. The main reason for this is that they freeze the size of the budget, keeping it identical to last year’s, without accounting for population growth.

So why has there been such a crisis around this year’s budget?
The 2021 interim budget will be unprecedented, because it comes after a whole year without an approved budget. The last budget approved by the government was signed just before the first elections in early 2019. This means that effectively, for much of 2021, the government will have to make do without the ability to respond to a drastically changed reality in pandemic. 

Another problem is that under Israeli law, budget surpluses of any given year can only be used once the next year’s budget has been approved. Since the government never approved this year’s budget before announcing elections, the considerable amounts of surpluses from the 2019 budget will disappear on the 1st of January, causing even greater fiscal stress.

Has a solution been reached? Will there be spending cuts?
Most likely, but their extent remains to be seen.

Crucially, just before dissolving last week, the Knesset approved several amendments to the budget law which will help mitigate the automatic budget cuts. Under the new law, the interim budget will be updated to match the rate of population growth, taking this significant factor into account.

Another amendment would allow the government to make use of 85% of the previous year’s budget surplus, as long as no policy decisions are changed. In other words, the government is allowed to make use of budget surpluses, but only for the uses they were originally intended for.

These two amendments will allow the government to keep running without being forced to make cuts which, according to the Ministry of Finance, would otherwise have reached up to 100 billion NIS. The interim budget will provide the government with a total annual budget of 419 billion NIS. This is still considerably lower than the budget proposed by the Ministry of Finance, which if approved, would have made available 426 billion NIS. This amounts to a 1.6% decrease in spending, due to the new elections being called without a budget passed

When is the earliest a budget can pass?
Since the elections aren’t until March, the next government is not expected to be formed until April 2021. Only when a government is formed can it work on a budget. The new government is expected to submit the new budget to parliament within two to three months of its forming, so under the very best scenario at least half of 2021 will be run under an interim budget. In a worst case scenario, the new government will again reach an impasse over the budget, starving public agencies of funds and tying the state’s hands in its’ ability to deal with the massive economic crisis brought about by coronavirus.