Ferguson and Steinetz on Israeli two-year budgets

…longer-term budgets have important advantages. They reduce uncertainty for the ministries, agencies and private companies that depend on government funds. Public investment in infrastructure is a good example; so are defense contracts. In each case, long-term engagements need to be made with contractors and the results take years to materialize. But the danger always exists of unexpected budget cuts that terminate unfinished projects at high cost to all concerned.

A more subtle advantage of longer-term budgets derives from the argument of the Nobel laureates Finn Kydland and Edward Prescott that rules are often preferable to discretion in the realm of economic policy.

…America’s fiscal problems will not be solved without some bipartisan agreement. Biennial budgets might just be the place to start. After all, this is an idea that was supported not just by Ronald Reagan and both Bushes, but also by Bill Clinton, Al Gore (leader in 1993 of the National Performance Review) and the current Treasury secretary, Jacob Lew.

Moreover, Israel’s experience has been a great advertisement. Not only did it enjoy an impressively rapid recovery from the financial crisis under the system of biennial budgets; more remarkably, when directors-general of Israel’s government ministries were polled in 2010, not one of them favored returning to what one called “the Dark Ages and the madness of the single-year budget.”

The NYT Op-Ed is here.  If you would like to read a criticism of the two-year budget, try this:

“There is no other country that has a dual-year budget. Why? Because it requires long forecasts,” Ben-Bassat told The Jerusalem Post on Monday.

The predictions for economic growth and tax collection for the past year’s budget were made two-and-a-half years earlier, in the summer of 2010. Simply put, Ben-Bassat says, “they were wrong. Very wrong.”

Ben-Bassat noted that although Israel’s hearty growth started consistently declining in the second quarter of 2011, the old estimates were not revised because of the inflexible budget.

“It doesn’t make sense for policymakers to tie their own hands,” he said. “The finance minister said he wanted to give certainty to the private sector, but he provided just the opposite. It actually created uncertainty.”

You will find another criticism here. You will note that the American states have been moving away from biennial budgets, partly because their revenues have grown more volatile.  Connecticut however uses a bifurcated system, where smaller agencies are on a two-year cycle.  In Washington state, the government enacts annual revisions to a biennial cycle (pdf).  In other words, the available space of options here is quite complex.

Overall I would not press a button to make this change happen.  That said, we Americans have not exactly been pivoting on a dime, with optimal changes in fiscal policy, in response to new economic data.


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