Israel’s paring of Palestinian tax funds hampers PA budget preparation

Palestinian Prime Minister Mohammad Shtayyeh said the 2020 budget will go back to being a regular one; the PA operated on an emergency budget last year after Israel cut the PA's tax funds.

al-monitor Palestinian president Mahmoud Abbas speaks as Palestinian Prime Minister-designate Mohammad Shtayyeh listens at Istishari Arab Hospital in Ramallah, Israeli-occupied West Bank, April 9, 2019.  Photo by REUTERS/Mohamad Torokman.

Jan 21, 2020

RAMALLAH, West Bank — After adopting an emergency budget last year as a result of Israel's drastic cut of Palestinian Authority's tax funds, the PA is planning to return to a more normal budget process this year, albeit a cash-strapped one.

The Palestinian Ministry of Finance is preparing the 2020 budget to be submitted to the government for discussion and approval. The government would then refer the budget to President Mahmoud Abbas for ratification since the Palestinian Legislative Council was dissolved by the High Constitutional Court on Dec. 12, 2018.

Palestinian Prime Minister Mohammad Shtayyeh told state-run Palestine TV on Jan. 4, “We will not begin the year 2020 with an emergency budget but an integrated one. We are preparing a budget along the lines of 2019 in terms of financial management.”

The drafting of a comprehensive budget is a challenge for the PA. This will be the first budget for Shtayyeh’s government since the PA did not approve the 2019 budget because of Israel’s decision to deduct about 502 million shekels ($145 million) from PA tax revenue, an amount Israel claims is equivalent to the sum the PA disburses to the families of Palestinian prisoners in Israeli jails and Palestinians killed or injured in attacks against Israelis. In response to Israel’s decision, the PA in February 2019 decided to refuse all tax transfers from Israel. But in October, the PA again accepted the tax transfers following a deal reached between Palestinian Minister of Civil Affairs Hussein al-Sheikh and Israeli Finance Minister Moshe Kahlon.

Another reason for the failure to pass the 2019 budget was the resignation of the government of national consensus on Jan. 29, 2019. It continued to work as a caretaker government until the new government was formed in April 2019, and during the interim period adopted an emergency plan to manage the crisis.

In December, Israel cut an additional 150 million shekels ($43 million), bringing the total deducted sum to 650 million shekels ($188 million).

The tax funds constitute the main source of revenues for the PA, which amounted to approximately 8 billion shekels ($2.3 billion) in 2018; the Israeli deductions come as a blow to Palestinian revenues.

“We will deal with every penny we receive and pay it to the employees, and we will not give in to the crisis,” Shtayyeh said in his statement to Palestine TV while expressing hope that Arab and international financial aid for Palestinians in 2020 will help the government get out of the crisis.

The secretary-general of the Palestinian Cabinet, Amjad Ghanem, told Al-Monitor, “We are in a financial clash with Israel, because the tax funds are still under threat. But we are determined to adjust to these conditions and plan to employ the public money the best way.”

 “It is very important to switch from an emergency budget into a regular one despite the difficult circumstances, because we seek systematic planning, setting our priority, and disbursing available funds according to priorities,” he added.

It is expected that the 2020 budget would be set at $6 billion, knowing that the last general budget approved by Abbas and the government in 2018 was $5.8 billion.

Ghanem said, “There is no exact value for the current budget. The discussions within the government will continue until February and the budget will be referred to the president for approval.”

“We are in a difficult state. This is why the government is moving to increase domestic production in industry, export and agriculture, as well as raising the level of foreign trade in a bid to increase revenues,” Ghanem added.

He denied that the government has the intention to add more taxes. “There will be a plan to enhance the collection of taxes horizontally to include citizens who have not been paying and to pursue evaders. The government will seek to make allocations for programs to support young people, for the development of smart and electronic services and to support the agricultural, industrial and tourism clusters plan, and to attract foreign investments,” Ghanem concluded.

While the PA fiscal year starts Jan. 1, the budget for it usually is not approved until well after the fiscal year starts.

Samir Abdullah, a former Palestinian minister of labor and planning and a senior researcher at the Palestine Economic Policy Research Institute, told Al-Monitor, “The government has a narrow margin for moving in preparing the budget. Sixty percent of the budget is for salaries, 20% for consumer expenditures and 7% to 10% for the social transfers for poor families. There will be little left for development.”

“Whether it was a regular or an emergency budget, it won’t make much of a difference in resolving our financial situation,” he added.

“With the Israeli tax reduction, the PA has to adapt to the situation by cutting down its expenses, especially since it is not relying on anyone for assistance, given the volatile international support for Palestinians,” Abdullah said.

Samir Hulileh, a businessman and an economist, told Al-Monitor, “The biggest challenge before the government in preparing the budget is to face Israel’s actions and restrictions on the tax funds.” 

Commenting on the need to have an emergency budget or a regular one, Hulileh said, “It boils down to the government’s determination to work and to determine the aspects of spending money according to an approved plan, in the hope that it would find the necessary means to keep funds flowing until the end of the year.”

“The current government has a clear vision and determination but is not capable of meeting its commitments. I do not expect the facts on the ground to change drastically due to the current circumstances. The tax funds crisis is escalating and international aid is declining. The only option would be to turn to Arab or international countries for support,” he concluded.

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