2021 Activity

Weak transparency, inadequate oversight, and lacking a government rationalisation and austerity plan worsens public budget deficit

Weak transparency, inadequate oversight, and lacking a government rationalisation and austerity plan worsens public budget deficit

In a discussion session held by the Civil Society Team for Enhancing Public Budget Transparency on widening and chronic public budget deficit

Weak transparency, inadequate oversight, and lacking a government rationalisation and austerity plan worsens public budget deficit

Ramallah – The Civil Society Team for Enhancing Public Budget Transparency (“Team”) organised a discussion session on the worsening and chronic public budget deficit. In the first half of 2021, budget deficit accounted for US$ 470 million in the light of continuing fiscal challenges facing the Palestinian government, ongoing Israeli piracy of clearance revenues, borrowing from banks, and growing public debt. This has adversely impacted the pension fund, service providers to the public sector, and structure of the public budget. The session aimed at coming up with recommendations and proposals to contribute to reducing public deficit and enhance public financial management.

Public Treasury loses over US$ 0.5 billion due to Israel’s policies and piracy

The session began with a thorough diagnosis of the fiscal deficit. Public debt amounted to US$ 3.6 billion, including US$ 2.3 billion in domestic debt and US$ 1.3 in external debt. In the Government Session No. 117, the Prime Minister stated that the Israeli occupying authorities have withheld clearance revenues and frozen prisoner allocations of some NIS 51 million a month, or NIS 612 million per annum. Between 2019 and July 2021, Israel withheld NIS 851 million of these appropriations. Furthermore, grants and aid have been on a downward trajectory (foreign grants and aid totalled NIS 245 million out of NIS 2.2 billion of estimated external financing on an annual basis; that is, 10 percent of estimated support). Financial liabilities owed by the Palestinian government were close to NIS 30 billion, including NIS 18 billion in arrears.

Discussants reviewed the Team’s vision, which assumes that improvement of domestic revenues requires the adoption of sustainable policies, reflecting the principle of tax justice. There are also avenues to increase revenues by addressing tax evasion. However, a major obstacle is created by fiscal leakage generating from Israel’s intransigence and theft. Multiple channels of fiscal leakage cause a loss of over US$ 0.5 billion.

Need to develop a comprehensive rationalisation plan for expenditure and improve the public budget structure

The Team is of the view that expenditures are still high. Public expenditure distribution to various sectors continues to be problematic. The security sectors has the lion’s share of expenditures. In 2020, spending on the security sector amounted to NIS 3.3 billion, or 21 percent of all public expenditure. Within the security establishment, promotions and appointments are maintained in spite of job inflation. Unnecessary and unjustified expenditures are identified, including petty cash in the security sector and annual honoraria in civil service. Consequently, a comprehensive expenditure rationalisation plan needs to be in place.

Need to suspend appointments and promotions in security agencies

In the midst of debate on the required action to emerge from the fiscal deficit crisis, participants stressed the need to adjust expenditure to available resources, without relying on foreign aid which has proven to be dwindling. Expenditure should also reprioritised while at the same time ensuring compliance with the 2021 Public Budget Law. More importantly, job inflation, wage bill, and salaries need to be addressed. Appointments and promotion within security agencies should be suspended. In the context of staff rotation, security personnel will be assigned to the Customs Police and Civil Police agencies.

Required action: Audit clearance invoices

Participants unanimously agreed that the root cause of the fiscal deficit is politically motivated. Clearance revenues are used as a bargaining chip to put pressure on the Palestinian Authority. The Team has suggested some solutions to eliminate once and for all net lending, which drains some NIS 1 billion per annum. To this end, mechanisms for accounting for the funds deducted by the Israeli side should be enhanced. In addition to auditing invoices, clearance deductions can only be processed in line with concluded agreements and understandings, particularly in relation to electricity. While invoices cannot deducted before they become due, line items will not be charged to net lending.

Investment in production sectors and increase of development expenditure

A gradual shift needs to be initiated from dominant operating expenses to development expenditure, which can help create a conducive investment climate. This will seek to expand domestic and foreign investment base, increase production, exports, and employment in agro-industrial production sectors, and scale up government domestic collection revenues.

Threat to sustainability of the pension fund

According to reports of the Coalition for Accountability and Integrity (AMAN), the total government debt owed to the pension fund stands for 50 percent, or NIS 9 billion, of all arrears. This poses a threat to the pension fund and affects its financial capacity to engage in investment and meet the obligation of paying pensioner benefits. The fact that the government has consistently failed to transfer civil servants’ subscriptions and government contributions to the Palestinian Pension Agency (PPA) has resulted in a dramatic surge in government debt to the pension fund, risking a collapse of the fund. These risks cannot not be disregarded. The government has attempted to conceal this debt by failing to disclose it in public debt data, which are supposed to include all government liabilities. This would show debt as if it were below the maximum limit permitted by the Public Debt Law. In reality, however, total government liabilities have overrun the legally prescribed threshold allowed by the law.

A remedy requires a government plan for rationalisation and austerity

The Team made a number of recommendations. Borrowing for financing current consumption expenses should be reduced. Borrowing under cumbersome conditions and at high costs will also be limited. Loans will be earmarked to viable investment and development projects that generate revenues capable of interest and principal debt repayments. Alternatively, loans will be reserved for infrastructure development projects with a view to promoting private investments that increase the economy’s productive potential, particularly in agro-industrial production sectors.

Through a policy intervention, a government plan will be devised to address the PPA debt stock of the Public Treasury to ensure sustainable functions of the PPA. This will also ensure the continued capacity of pension funds to pay pensions to subscribers on reaching retirement age, as well as regular full payments of subscriptions and contributions owed to retired civil servants. A plan will be developed to reschedule the debt overhang of the Public Treasury. Accordingly, debt can be paid over a number of years by making arrear or debt payments, taking account of interests on that debt in tandem with the provisions of the law.