According to the International Monetary Fund (IMF), Israel meets the requirements of the fiscal transparency code in many areas. Oxford Analytica, in its 2006 report on fiscal transparency in Israel, states that Israel's overall score of "Enacted" remained unchanged from the previous year. The main area where further improvements are possible is budgetary preparation and specifically the macroeconomic underpinnings of the budget. Israel subscribes to the Special Data Dissemination Standards (SDDS) and is in full observance of the SDDS's prescriptions for data coverage, periodicity and timeliness, and for the dissemination of advance release calendars. The government's commitment to improving fiscal transparency now includes the area of defense spending. For the first time, the 2007 draft budget contains detailed information on the non-classified parts of the defense budget, making them accessible to the entire Knesset and the general public. The IMF considers that the frequent fiscal policy slippages in the past and the high debt ratio were partly due to a budget debate that is overly focused on the short run and weaknesses in the fiscal policy framework. The government has agreed to explore the possibility of adopting a multi-year budget framework to ensure insulation of future budgets from short-term political pressures.

General Overview

According to the International Monetary Fund (IMF), in a 2004 Report on the Observance of Standards of Codes (ROSC) of fiscal policy transparency in Israel, the country meets the requirements of the fiscal transparency code in many areas. The main area where further improvements are possible is budgetary preparation and specifically the macroeconomic underpinnings of the budget. Israel subscribes to the Special Dissemination Data Standards (SDDS) and is in full observance of the SDDS's prescriptions for data coverage, periodicity and timeliness, and for the dissemination of advance release calendars. (IMF 2004, p. 1; IMF 2007, p.1)

According to Oxford Analytica, in its 2006 report on fiscal transparency in Israel, The government of Israel's commitment to enhancing fiscal transparency is proving effective, and a number of improvements in information availability have taken place this year. While the defence budget has traditionally been considered opaque, the Ministry of Finance (MoF) has made efforts to strengthen its control over expenditures carried out by the Ministry of Defence (MoD). The 2007 draft budget contains detailed information on the nonclassified parts of the defence budget, which amount to approximately one-third of the total defence budget. While in the past these figures were only made accessible to one Knesset committee and a small team in the MoF, this year they have been given to the entire Knesset and have been made publicly available. (OA 2006, p. 233)

Following the IMF recommendation to improve cooperation between the MoF and the Central Bureau of Statistics (CBS), the Budget Department and the Accountant General Department of the MoF, as well as the CBS, have created a joint working group to promote the compilation of fiscal data according to the GFSM 2001 methodology. Although its meetings, which began in February 2006, were interrupted by the Lebanon war and the process of budget preparation, the working group is expected to resume its activity shortly. To improve the coordination and dissemination of statistics, the frequency of meetings of IMF Special Data Dissemination Standard (SDDS) coordinators from the CBS, MoF and Bank of Israel (BoI) has been increased, and -- since February 2006 -- these meetings take place quarterly. Some CBS data are being harmonised to comply with Eurostat protocols and, as of July 2006, national accounts include tax and import data, which were previously published separately. Work is ongoing to ensure that all general government accounts are in line with Eurostat methodology. (OA 2006, p. 233)

The report on budget execution prepared annually by the Accountant General of the MoF has usually been released with a considerable delay. In 2006, the report has been combined with the financial statement and the publication lag -- which used to be six months -- has been reduced to four months. It is hoped that the delay will be further cut to three months starting from next year. The English version of the Accountant General report is usually made available at a later stage than the Hebrew one. However, information on deficit, revenues and expenditures can be found in both English and Hebrew on the Accountant General's new website, launched in November 2006. (OA 2006, p. 233)

The authorities have agreed to explore the possibility of adopting a multi-year budget framework -- recommended by the IMF -- to help ensure that future budgets are better insulated from political pressures and reflect long-term priorities. Multi-year budget frameworks have been adopted in certain line ministries, but some government officials are convinced that parts of the bureaucracy, notably the MoD and the MoF, need to retain some flexibility and should therefore not be bound by a medium-term expenditure framework. The government has introduced a computerised accounting system known as 'Merkava'. However, full implementation of this accounting system is expected to take a long time, as not every ministry has adopted it. With the introduction of Merkava, the MoF will be able to get information on the spending of line ministries before rather than after the fact, as ministries will have to input their expenditures into the system before they are executed. (OA 2006, p. 233)

In a 2007 IMF "Selected Issues Paper" on "Fiscal Institutions and the Political Economy in Israel", the authors concluded that there are many ways to improve fiscal governance in Israel. Key will be improvements in budgetary transparency and analysis. However, both theoretical and empirical evidence from other countries and for Israel suggests that the political infrastructure in Israel might be distorting fiscal policy. Institutional reform could help counter the distortionary forces. Both theory and experience suggest that better institutions can improve the quality of fiscal policy. In particular, fiscal committees or agencies can help improve fiscal discipline, policy credibility, and serve a useful signaling role conducive to more stable expectations and less uncertainty. International experience suggests that there are many ways to proceed and the various options would need to be carefully explored bearing the Israeli context in mind. (IMF 2007a, p. 16)

Similarly, in the 2006 Article IV consultations between the IMF and Israel, IMF staff considered that the frequent fiscal policy slippages in the past and the high debt ratio were partly due to a budget debate that is overly focused on the short run and weaknesses in the fiscal policy framework. The Deficit Reduction Law (DRL) lacked stability and credibility, although the adoption of a real expenditure growth ceiling had improved fiscal performance. However, that ceiling had already been raised once, from 1 to 1.7 percent, and had been suspended repeatedly because of the geopolitical events. Moreover, the frequent and noticeable deviations of fiscal outcomes from targets detracted from the predictability of fiscal policy and thus might be harming economic activity. Overall, staff thought that there was insufficient awareness of the risks posed by the high public debt in a political economy environment that is not naturally conducive to debt reduction. (IMF 2007b, p. 13)

The mission thus proposed various options to strengthen the policy framework and raise awareness of the detrimental impact of the public debt: (1) Better budgetary preparation and transparency, in line with the recommendations of the 2003 Fiscal ROSC. Specifically, the mission called for the budget documentation to include a medium-term fiscal scenario based on unchanged policies; a listing of all the policy changes and their fiscal impact; a systematic assessment of the impact of shocks and forecast errors on fiscal variables; and a long-term fiscal sustainability analysis. (2) A stronger fiscal governance mechanisms. IMF staff thought that one option for Israel could be a committee of independent experts, possibly similar in structure to the new National Economic Council that regularly publishes comprehensive fiscal policy analysis and advises on the design and implementation of the fiscal framework. But other options that built on existing commissions or institutions might well deliver similar results. (IMF 2007b, p. 14)

The authorities were sympathetic to the staff's views and endorsed the call for more medium-term fiscal policy analysis but saw no pressing need for significant institutional change. Bank of Israel (BoI) Governor Fischer thought a committee of independent experts was unnecessary because the BoI could deliver the required analysis--indeed, the Bank already evaluates the budgets in its Recent Economic Developments reports of the fall. The MoF noted that several commissions/councils were already looking into fiscal matters. Also, the transparency of public finances had been improved by publishing for the first time large portions of the defense budget. Nonetheless, Minister Hirchson agreed on the need to enhance the exchange of information between the MoF and the Knesset Finance Committee, which has only one professional staff to conduct fiscal analysis. He was considering establishing an MoF-Knesset working group to achieve this goal. (IMF 2007b, p. 14)

The report on the 2006 consultations goes on to note that tight expenditure policy together with the recovery significantly reduced the central government budget deficit, anchoring investor expectations during the war, but public debt remains high. Following years of unsuccessful implementation of the Deficit Reduction Law (DRL), the government buttressed the framework in 2004 with a 1 percent ceiling on real central government expenditure growth during 2005−10. As a result, the central government cash deficit fell to 1.9 percent of GDP in 2005 and is expected to narrow further to around 11/2 percent of GDP in 2006, notwithstanding the hostilities. (IMF 2007b, p. 5)

Still, all parties involved in the 2006 Article IV consultations agreed that the public high debt was constraining policy options and needed to be lowered. A debt sustainability analysis suggests that there is little room for more public support during period of relatively low growth--even more so during recessions--without causing adverse debt dynamics. Furthermore, there is a need to begin preparing for a growing proportion of older and needier citizen in the future, even if Israel's population is still relatively young. In fact, assuming that the central government achieved its deficit targets for 2007-09 and maintained the deficit at 1 percent of GDP thereafter--implying balance or surpluses in years of high growth--it would take until at least 2025 to reach a debt-to-GDP ratio of 60 percent, a level that is considered an upper bound reference value for many advanced economies. (IMF 2007b, p. 11)

The authorities explained that their consolidation strategy was to stick to the pre-war central government expenditure path except for a temporary deviation on account of war-related spending. For 2007, real expenditure growth would be held to 1.7 percent upon excluding war-related outlays (equivalent to 3/4 percent of GDP). Keeping expenditure within this constraint required measures equivalent to just over 1/2 percent of GDP. The budget proposed freezing welfare benefits; cutting railroad investments; and various other measures, including across-the-board cuts. Overall, the central government budget deficit in 2007 is expected to be no higher than 2.9 percent of GDP, assuming real GDP growth of 3.8 percent and average inflation of 1.4 percent. (IMF 2007b, p. 12)

IMF staff supported the central government expenditure policy but, pointing to the significantly larger general government deficit- expected at over 4 percent--and the challenges presented by the high debt, underscored the need for greater ambition with respect to deficit reduction in 2007. The mission specifically cautioned against new tax cuts, even if revenues turned out stronger than projected, and in this connection was also critical of the June 2006 VAT cut that had been implemented at short notice amid buoyant tax receipts. (IMF 2007b, p. 12)

The Principles

Clarity of roles and responsibilities.

EN

Oxford Analytica, in its 2006 report on fiscal transparency in Israel, rates Israel's compliance with this principle as "Enacted." According to the 2003 International Monetary Fund (IMF) assessment, the coverage of general government in Israel adheres quite closely to the recommended coverage of System of National Accounts 1993 (SNA1993). General government consists of the state, the National Insurance Institute (NII), a social security institution, a number of extra-budgetary funds, the National Institutions, several decentralized agencies and nonprofit institutions that are largely financed by the central government, 266 local authorities, local associations and religious councils. (OA 2006, p. 234; IMF 2004, p. 4)

Israel's Basic Laws, which have constitutional status, set out the structure, functions, and responsibilities of the government. Under these laws, the general government consists of the government ministries, local authorities, non-profit institutions (including universities, secondary schools, sick funds, community centres, museums, research institutes, and similar entities), and the National Insurance Institute. The government would like to merge some municipalities in 2007 in order to increase the capacity of local authorities to manage expenditure programs. However, this might be politically difficult to do, and thus far only twelve municipalities have been merged. The budgetary department of the Ministry of Finance (MoF) is responsible for public expenditure, the coordination of the budget-planning system and multi-annual planning. The Department of the Accountant General (DAG) within the MoF is responsible for budget implementation, control of state liabilities, establishing financial and economic procedures, and managing the government accounts.. (OA 2006, p. 234)

Responsibilities between the different levels of government are clearly allocated in law. The coordination and management of budgetary activities are centralised within the MoF, and last year management of the government's domestic loans also shifted from the Bank of Israel to the MoF. The Basic Law of the government does not, however, allocate a division of expenditure programme responsibilities between the central government and local authorities. Israel is a centralised state, and over the years, the MoF has developed a strong technical capacity and expertise concerning budgetary activities. This has made it difficult for external analysts to review the budgetary figures that the MoF produces. For example, in 2002, although the MoF's revenue and spending projections came under heavy criticism, no other organisation had the broad range of expertise or technical capacity to challenge the MoF's assumptions. The result was that, within a few months following passage of the budget, two supplementary budgets had to be introduced. The MoF is aware of this problem and has started to amend matters, but no changes have been put in place as yet. The DAG of the MoF is responsible for ensuring the compliance of budget execution with appropriations. (OA 2006, p. 234)

Mechanisms for the coordination of extra-budgetary funds and activities within the budget are well defined. However, according to Oxford Analytica, an ongoing source of concern to analysts is the government's propensity, in all proposed budgets, to leave large funds under the section labelled 'reserves'. General reserves are usually intended to fund the secret services, which almost automatically receive around two-thirds of the funds allotted. The remainder is allegedly used for security crises and other unforeseen activities. Line ministries' budgets include a 3% reserve to deal with unanticipated crises. However, the 'free' reserve money has usually been used more prosaically to cover sudden increases in spending as a result of political deals in the Knesset (Israel's legislature), or to cover mistakes made by the MoF in overly optimistic projections. (OA 2006, p. 234)

The IMF, in its 2004 assessment, reports that government activities are clearly distinguished from those of public financial institutions and non-financial public (state-owned) corporations (NFPCs), although the NFPC sector remains relatively large. Privatization processes are generally transparent. The legal basis for privatization can be found in the Government Companies Law (GCL). Government regulation of utilities and the private sector is generally transparent. In the case of utilities, the regulatory approach varies somewhat from industry to industry. (IMF 2004, p. 4; IMF 2004, p. 5; IMF 2004, p. 6)

According to Oxford Analytica, the government still owns or is the majority shareholder of some large companies in Israel, (such as Israel Aircraft Industries, Discount Bank and Mekorot), but in 2005 it instigated a privatization drive. The government companies report quarterly and annually to the Government Companies Authority which publishes an abstract of the accounts in its Annual Report to the public. Bezeq, Israel Oil Refineries and Bank Leumi now publish quarterly financial reports as they are publicly traded on the Tel Aviv Stock Exchange. The government does not privatize when it would lead to a monopoly. On the whole, privatization is carried out in a transparent manner, and the legal basis for privatization is detailed in the Government Companies Law. (OA 2006, p. 236)

The legal framework for the Bank of Israel (BOI) clearly demarcates its activities from those of the government. The Bank does not engage in quasi-fiscal activity. In addition to its roles in formulating and conducting monetary policy and regulating the banking system, the BOI acts as the fiscal agent for the government. It does not charge for its services, or maintain a record of their cost. (IMF 2004, p. 6)

The legal framework establishes a clear allocation of responsibilities between different levels of government and a stable basis for intergovernmental fiscal relations. The Basic Law of the Government, which establishes the framework of government does not determine a division of expenditure program responsibilities between the central government and the local authorities. (IMF 2004, p. 6)

The basic principles of the legal and administrative framework of fiscal management and expenditure are clear. The Basic Law of the State Economy (BLSE) and the Foundations of the Budget Law (FBL) give the government the authority to tax and spend. The BLSE stipulates that any tax, compulsory levy or other compulsory payment requires a law, or must be imposed under law. The FBL, which corresponds to a general budget law, limits the amount the government may spend in any financial year to the amount specified as expenditure in the Annual Budget Law (ABL). Mechanisms for the coordination of extra-budgetary funds and activities with the budget are well defined. (IMF 2004, p. 7)

Taxation has a clear basis in law. All tax laws, including those laws that would establish new taxes or modify existing ones, require for their approval a simple majority in the Knesset. Tax expenditures also require the Knesset's approval. Similarly, amendments to existing legislation require legislative approval. However, Oxford Analytica reports that one of the main complaints regarding taxation is the length of time it takes to resolve tax disputes. This does not look likely to improve in the near future. (IMF 2004, p. 8; OA 2006, p. 237))

Public servants are subject to a code of behavior and other provisions that enjoin the ethical and impartial discharge of their duties. The civil service is subject to the provisions of various statutes as well as the provisions of general laws that pertain to issues of conflict of interest and moral rectitude. Tax officials in particular are bound by a code of confidentiality to which only a few well-defined exceptions apply. The civil service is also subject to a number of administrative directives. The civil service must adhere to a code of ethics. Most civil service positions are filled by competition based on merit. The code, however, is only available in Hebrew. (IMF 2004, p. 9; OA 2006, p. 237)

Open budget processes

EN

Oxford Analytica, in its 2006 report on fiscal transparency in Israel, rates Israel's compliance with this principle as "Enacted." As pointed out by the International Monetary Fund (IMF) in its 2004 report, the budget classification does not fully conform to international norms. The budget presentation emphasizes financial compliance rather than program performance or the macroeconomic role of fiscal policy. (OA 2006, p. 241; IMF 2004, p. 13)

According to the 2004 IMF fiscal transparency Report on the Observance of Standards and Codes (ROSC), the area requiring most improvement is the way in which the budget is prepared and presented. The IMF recommended that the budget documents include a more systematic analysis of the sensitivity of the budget to economic and financial shocks, and additional information on budget execution (including a revised projection for the year in course). Furthermore, the IMF recommended that the expenditure classification should be revised to conform more closely with international standards. The IMF also notes that the general government deficit is not an especially useful fiscal indicator. (OA 2006, p. 223)

The major stages of budget preparation and approval follow a regular schedule, in which the Ministry of Finance (MoF) plays a key role. The deliberations of the budget proposal at the Knesset are open to the public. The Annual Budget Law (ABL) sets out the government's fiscal objectives and describes the macroeconomic framework that underlines the budget. (IMF 2004, pp. 13-14)

The macroeconomic framework has a clear, transparent set of goals, and includes medium- and long-term budgetary goals, such as the expenditure and deficit limits. It is set out in the Major Provisions of the Budget section of the Budget Proposal and now projects as far as 2010. The same section sets out the targets for the coming fiscal year and outlines government policy for major economic and social sectors. The Composition of the Budget section is intended to provide a comprehensive explanation of current expenditure and how it will be used in different economic sectors. However, this section cannot be relied upon as a definitive predictor of government activity. At the mid-term of each fiscal year, funds are invariably transferred from one sector to another to cope with stopgap needs. For example, in 2006, there was a large cut across the board in order to transfer funds to military needs. As these transfers are deemed necessary on a fairly regular basis, there are no formal plans to limit them. (OA 2005, p. 242)

The budget documents do not include substantial analysis of the sensitivity of the budget estimates to changes in economic and financial conditions and do not discuss the main fiscal vulnerabilities. The budget documents do not contain either a comprehensive discussion of fiscal vulnerability, or an analysis of the sensitivity of the deficit to shocks to the economy. (IMF 2004, p. 15)

The budget documents include medium-term fiscal projections as prescribed by the Deficit Reduction Law (DRL), and beginning with the 2004 budget these projections will be supported by a detailed medium-term macroeconomic framework. The medium-term fiscal projections are not informed by analyses of fiscal sustainability. In particular, there is no analysis of the sensitivity of public debt to economic and financial shocks, such as unexpectedly low primary balances, higher than projected interest rates, or exchange rate depreciation. (IMF 2004, p. 15)

However, in the 2006 Article IV consultations, the IMF mission proposed various options to strengthen the policy framework and raise awareness of the detrimental impact of the public debt: (1) Better budgetary preparation and transparency, in line with the recommendations of the 2004 Fiscal ROSC. Specifically, the mission called for the budget documentation to include a medium-term fiscal scenario based on unchanged policies; a listing of all the policy changes and their fiscal impact; a systematic assessment of the impact of shocks and forecast errors on fiscal variables; and a long-term fiscal sustainability analysis. (2) A stronger fiscal governance mechanisms. IMF staff thought that one option for Israel could be a committee of independent experts, possibly similar in structure to the new National Economic Council, that regularly publishes comprehensive fiscal policy analysis and advises on the design and implementation of the fiscal framework. But other options that built on existing commissions or institutions might well deliver similar results. (IMF 2007b, p. 14)

The authorities were sympathetic to the staff's views and endorsed the call for more medium-term fiscal policy analysis but saw no pressing need for significant institutional change. Bank of Israel (BoI) Governor Fischer thought a committee of independent experts was unnecessary because the BoI could deliver the required analysis--indeed, the Bank already evaluates the budgets in its Recent Economic Developments reports of the fall. The MoF noted that several commissions/councils were already looking into fiscal matters. Also, the transparency of public finances had been improved by publishing for the first time large portions of the defense budget. Nonetheless, Minister Hirchson agreed on the need to enhance the exchange of information between the MoF and the Knesset Finance Committee, which has only one professional staff to conduct fiscal analysis. He was considering establishing an MoF-Knesset working group to achieve this goal. (IMF 2007b, p. 14)

Oxford Analytica notes that the complete budget is only published in Hebrew. Net expenditure and revenue-contingent expenditure constitute the gross budget. The National Budget specifies amounts as net expenditure, gross expenditure and revenue-contingent expenditure. Budget items of each expenditure type are also detailed. The Treasury publishes a 'blue book' for each ministry, commenting on its performance. It is moving towards reporting quantified physical results of expenditure, such as number of kilometers of roads built. A move to performance-based budgeting would improve transparency and aid parliamentary scrutiny of the budget process, but there are obstacles to measuring productivity in some ministries which would need to be overcome if this were to be implemented across the board. The MoF recognises that it will take years to implement performance-based budgeting. Commentators stated that the budget process is transparent, if not necessarily the budget itself. (OA 2006, pp. 242, 243)

The central government accounting system produces timely and accurate data. All government departments and agencies apply uniform accounting codes and record expenditure on a commitments basis. The Department of the Accountant General (AGD) maintains a well-designed integrated Fiscal Management Information System (FMIS), which is linked to its treasury accounts, which, in turn, are linked to the BOI. This integration facilitates the reconciliation of treasury accounts with government accounts held at the BOI. The FMIS system produces a complete and aggregated monthly report on central government activities. This report is published on the first day of every month. (IMF 2004, p. 16)

Internal controls are strong, and both internal and external audits are well developed. The Foundations of the Budget Law (FBL) confers on the AGD the responsibility for financial oversight in all ministries. To oversee treasury functions, the AGD places its staff in each of the ministries. In addition, the Internal Audit Unit (IAU) of the AGD in the MoF is responsible for the internal audit of the execution of the state budget in all ministries' accounting and finance units. (IMF 2004, p. 16)

The IAU also monitors the correction of irregularities found in the internal audits and in audits by the State Comptroller's Office (SCO). The IAU's operations are regulated by the Civil Service Code and by the AGD's procedural directives. The practice of external audit of the government's financial accounts is well established. The State Comptroller Law requires that the minister of finance submit to the State Comptroller (SC) a comprehensive report on the execution of the State budget within six months after the end of the fiscal year, and the State balance sheet within nine months after the end of the fiscal year. Efforts are being made to improve the accountability of local authorities. The government plans to improve the accountability of local authorities for the amounts they spend. Procurement policy and procedures are well developed and adequately publicized. (IMF 2004, p. 17)

The tax and customs administrations are given adequate legal protection from political interference. The laws prescribe that the tax and customs administrations shall exercise their duties independently from other government bodies and that other government bodies are prohibited from interfering in their functions of tax assessment and collection. (IMF 2004, p. 17)

Public availability of information.

EN

Oxford Analytica, in its 2006 report on fiscal transparency in Israel, rates Israel's compliance with this principle as "Enacted." Comprehensive information is available online, though there is a need for more laws and relevant information to be available in English. While the Ministry of Finance (MoF) is planning on translating economic laws into English, there are no plans to publish the entire budget in English, as this is not viewed as an efficient use of resources. (OA 2006, p. 238)

The budget documents are comprehensive -- though not detailed -- and cover most fiscal activity by the government. Extra-budgetary data on pensions, the National Insurance Institute, and other government enterprises are included in the Budget Proposal document. Estimates of central government tax expenditures are included in the budget documentation. Information on financial assets and on gross and net public debt is published. Detailed information on government equity holdings in public and private enterprises and financial statements of privatization operations is included in the annual report of the Government Companies Authority. The Central Bureau of Statistics (CBS) publishes quarterly and annual information on the level, maturity and currency composition of gross central government debt, in line with the International Monetary Fund (IMF) Special Data Dissemination Standard (SDDS). Commentators have noted, however, that there is a habit of publishing data without complete explanations of what the figures mean, and also that the complexity and lack of clarity in the budget makes it difficult to judge whether stated policies were being carried out in practice.(OA 2006, p. 238)

Israel is a subscriber to the International Monetary Fund Special Data Dissemination Standards (SDDS) for economic and financial statistics and meets its specifications for the coverage, periodicity, and timeliness of the data. Chapter three of the State Comptroller Law requires the government to publish fiscal data. Further, Article 49 of the Foundations of the Budget Law (FBL) states that a quarterly performance estimate of the deficit and its financing must be released at the end of each quarter and submitted to the Knesset Finance Committee. (IMF SDDS website; IMF 2004, p. 11)

Similar to Oxford Analytica, the IMF also found publicly available information on the central government comprehensive but not detailed. The published budget documents include a functional and an economic classification of expenditure that is highly aggregated. The classification scheme for expenditure and revenue does not fully conform to international standards. In particular, capital revenue includes loan proceeds, and expenditure includes debt amortization. (IMF 2004, pp. 9-10)

The published budget documentation reports an aggregate figure for defense. Defense expenditure is clearly identified in the budget, under a functional and administrative classification, but for national security reasons only an aggregate figure is reported. The published budget documents include comparative figures on the previous year's budget, realized figures for the year before that, and projections for the next two years. However, estimates for the previous year's fiscal performance (expenditures) are not included in the budget documents. The BLSE requires that the budget proposal include a three-year projected budget (i.e., disaggregated projections for revenue and expenditure), which must be consistent with the deficit targets that the DRL has established. These medium-term projections, which are not binding on subsequent budgets, do not require Knesset approval. (IMF 2004, p. 10)

The regular publication of data on the execution of the budget is required by law and a calendar of release dates is routinely announced. The Basic Law of the State Economy (BLSE) and the FBL require the Ministry of Finance (MoF) to submit a report on the execution of the state budget to the Knesset no later than six months after the end of the fiscal year. This annual report, prepared by the Accountant General's Department (AGD) of the MoF, must contain information that is at least as detailed as that in the ABL, and must explain in detail the more significant transfers from one line item to another. Comprehensive quantitative information on most of the central government's contingent liabilities is published. (IMF 2004, pp. 10-11)

Comprehensive quantitative information on most of the central government's contingent liabilities is published. The information on the rest of general government is comprehensive, but not timely. Aggregate measures of general government activity are not an important input to the fiscal policy debate. Information on financial assets and on both gross and net public debt is published. By law, the Department of the Accountant General (AGD) must prepare a balance sheet showing government assets and liabilities no later than nine months after the end of the fiscal year. (IMF 2004, p. 11)

According to Oxford Analytica, commentators judged the defence budget to be the least transparent of all budget items, as it is separate from the main budget. However, increasing transparency of the defence budget and the strengthening of MoF control over Ministry of Defence (MoD) expenditures are some of the MoF reform priorities for 2007. At present, if the defence ministry wishes to alter its budget, it can do so immediately, only having to obtain de facto authorization from the MoF and the Knesset Finance Committee. The only existing limiting provision on defence spending is an order from the MoF stipulating that, if the defence ministry wishes to increase spending by more than 90 million Israeli shekels (approx. 19 million US dollars), it must ask in advance. The MoF is suggesting that the MoD de-classify more figures. The 2007 draft budget already contains detailed information on the non-classified parts of the defence budget, which amount to approximately one-third of the total defence budget. While in the past these figures were only made accessible to one Knesset committee and a small team in the MoF, this year they were given to the entire Knesset and were also made publicly available. While previously the MoF appointed all line ministries' accountants, excepting only the MoD, as of 2006 the MoF also appoints the MoD accountant and is therefore able to access more information on the defence budget. (OA 2006, p. 239)

Independent assurances of integrity.

CP

Oxford Analytica, in its 2006 report on fiscal transparency in Israel, rates Israel's compliance with this principle as "Compliance in Progress." The Central Bureau of Statistics (CBS) collates and publishes all statistical information in Israel. The bureau meets the International Monetary Fund (IMF) Special Data Dissemination Standard (SDDS) for data quality. Effective tools and procedures are in place to assure the reconciliation and internal consistency of fiscal data. Budgetary projections have been less reliable in recent years than they could have been, though revenue projections were more reasonable in the 2004 budget. (OA 2006, p. 247)

According to the 2004 IMF Report on the Observance of Standards and Codes (ROSC) for fiscal transparency, revenue projections in recent budgets have been based on relatively high estimates of the elasticity of revenues with respect to their bases. This practice has made budgetary projections less reliable than they could be. The need for the projections to comply formally with the Deficit Reduction Law's (DRL) targets creates incentives to make optimistic revenue projections. (IMF 2004, pp. 17-18)

Effective tools and procedures to assure the reconciliation and internal consistency of fiscal data are in place. The Department of the Accountant General (AGD)'s managerial information system ensures that the approved appropriations are not exceeded and that the reconciliation of commitments, budgetary appropriations, payments and bank account transactions is effective and timely. The AGD's annual report allows for a systematic reconciliation of annual final accounts with budgetary appropriations. (IMF 2004, p. 18)

The State Controller (SC) is responsible for external audits. He or she is independent of the executive branch. The scope of the State Comptroller's Office (SCO) audits is virtually unlimited. In addition to effectiveness and efficiency, the SC's audits place great emphasis on the legality of government operations and the impartial and ethical conduct of the officials responsible for them. The SC is elected by the Knesset in a secret ballot, for a single seven year period. He or she can be removed only by two-thirds majority of the Knesset. The SC is subject to regulations that strictly prohibit his involvement in any matter that might entail a conflict of interest. In carrying out his functions, the SC is responsible only to the Knesset and is not answerable to the government. (IMF 2004, p. 18)

The SC bases its audits on timely and comprehensive information. No later than four months after the end of the fiscal year, all audited bodies must submit a report to the SC on their financial operations during the year. The SC may also require additional information from audited bodies such as a balance sheet at the end of the fiscal year. Mechanisms are in place to ensure that audited agencies take appropriate action in response to the SC's findings and recommendations. (IMF 2004, p. 19)

The Central Bureau of Statistics (CBS) is the agency responsible for the national statistics system and uses fiscal information for preparing the national accounts. The legal basis for public statistics is given by the Central Bureau of Statistics Ordinance (New Version), 1972. The head of the CBS, the Government Statistician, is appointed by the government, upon the proposal of the prime minister. The law provides that the CBS is to act on the basis of scientific considerations in carrying out its functions. (IMF 2004, p. 19)