The International Monetary Fund has given its blessing for Israel
to switch to two-year budgets and change the way fiscal spending is allocated.
Israel's cabinet earlier this month approved a plan to adopt a dual-year budget for 2011 and 2012 and plans to accelerate growth in state spending to 2.6% next year. Parliament is due to vote on both measures later this week.
The government adopted a dual-year budget for 2009 and 2010 after it took over last April.
"We see the government's decision to adopt two-year budgets as integral to the success of the new fiscal rule," Peter Doyle, head of the most recent IMF mission to Israel, wrote in a letter to Finance Minister Yuval Steinitz. A copy was e-mailed to Reuters on Tuesday.
"It will avoid the burden of annual budget negotiations and thereby allow greater focus on efficient implementation of expenditure policies," he said.
Doyle added that a two-year budget will strengthen public accountability by giving greater prominence to clear aggregate budget spending ceilings and it has important countercyclical properties to help Israel respond to current and future global and domestic economic shocks.
The cabinet also approved new fiscal rules governing the rate of growth in state spending, which will be linked to the pace of economic growth and a decline in the ratio of debt to gross domestic product.
Spending had been limited to growth of 1.7% a year but based on its new formula, that will rise to 2.6% in the 2011 budget.
"Firm commitment by the government to this rule, starting with the next budget, will help to anchor market expectations and confidence," said Doyle. "This is critical given still heightened uncertainties in the global economy as well as ongoing geopolitical issues in the region."
Doyle urged Israel to "redouble" efforts to strengthen its medium-term spending planning procedures.
"This would ensure that the two-year spending allocations are well defined and that they appropriately reflect longer term priorities and constraints," he said.
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