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The Day After Project Overview of Local Governance – Civil Services and Government Policy

עודכן: 17 באוג׳

Dana Vaknin Ganel 

 

Supervision: Yoni Ben Bassat 

Chief editor: Amit Ben-Tzur 

Hebrew editing: Daphna Lev 

English translation: Dr. Carly Golodets 

Design: Adi Ramot 

December 2023 


The project was written in response to the revealed weaknesses of the government and public services during the October 7 War. 

 

 

Israel is characterized by inequality among local authorities, expressed by significant socioeconomic disparities. Because of the public services that local authorities are responsible for providing, including education and welfare, this inequality affects overall inequality in Israel (OECD, 2021a). Moreover, this inequality is exacerbated by the highly centralized nature of the national government’s authority compared to the local government. All these problems still exist today, despite several reforms that have been introduced in recent decades to deal with them (Levi et al., 2020). 

The disparities among the authorities stem from direct government under-budgeting of balance grants; under-budgeting of public services (allocated budget), which require additional funding by the local authority even if it lacks funding sources; and disparities in local government revenues due to an inability to generate economic income through business property tax or low income from residential property tax in authorities with low-income populations. Furthermore, the absence of a governance level with statutory authority between the central and local governments leads to ineffective conduct by the local authorities vis-à-vis the central government, due to the conduct of each authority with the central government on an individual basis, exacerbating the inequality among authorities (Levi et al, 2020). 

 


Overview of Local Governance in Israel 

  1. The services operated by the local government in Israel are characterized by high inequality among authorities 


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  1. The outcome indicators of local government activity in Israel are also characterized by high inequality 


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  1. The variation in disposable income among regions in Israel is the highest in the OECD


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The Four Main Problems 

Direct under-budgeting of local authorities by the state: balance grants and operative costs 

As of 2021, 42% of the local authorities’ revenues come from government ministries (Figure 6). Most of this budget is allocated to local authorities for welfare and education services, meaning it is designated for specific purposes and cannot be reallocated (“allocated budget”). Therefore, an increase in the budgets of the Welfare and Education ministries would also increase the budget received by local governments from these ministries. We discuss these budgets extensively in other papers (for further reading: Bar-Haim, 2023; Vaknin Ganel, 2023).  


 

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Besides the “allocated” education and welfare budgets, the direct funding of local authorities, which appears in the state budget as the Ministry of Interior’s expenditure for local authorities, is provided in the form of grants (including balance grants, listed as “other” in Figure 6). Our analysis, based on an examination of the gap in civilian expenditure between Israel and the OECD average, shows that the budget supplement required for local government stands at 3.5 billion ILS, including 2.8 billion ILS in grants for local authorities. 



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When we examine local authority revenue per resident, by socioeconomic cluster, it becomes clear that the revenue from the government (balance grants, budget for welfare and education services and more) increases with lower socioeconomic ranking of the authority. Nevertheless, these transfers, particularly the balance grants, do not fully close the gaps, and the revenue inequality among authorities persists due to disparities in their own-source revenues (Figure 8). Moreover, we can see that expenditure by local authorities is similar to their own-source revenue, in other words, they do not spend beyond their means. This indicates that the revenue structure reflects the scope of services that authorities are able to provide. 



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What needs to be done?  

Gradually increase the budget of the Ministry of the Interior by 3.5 billion ILS for ministry expenses related to local government and for balance grants, regional grants and development funds (government investments in dedicated local authorities, for example, Jerusalem and the Bedouin settlements). There is a broad consensus on increasing the balance grants, a step previously recommended by Ben Bassatt and Dahan (2009), Aaron Institute for Economic Policy (Mufkadi and Shalem, 2018), the OECD (OECD, 2020) and the draft recommendations of the Balance Grant Assessment Committee (Arlozorov, 2022). 

Under-budgeting of the public services funded with the assistance of the local authorities 

Local authorities are required to supplement the “allocated” welfare budget with their own-source revenue (matching funds). This amounts to 25% of the welfare budget (for each 0.75 agurot provided by the government, the authority must add 0.25 agurot), and a different percentage in the education sector. Without this matching, the authorities do not receive government funding for these areas. Due to various administrative and financial difficulties, a significant budget gap has emerged among the authorities. In the case of welfare services, for which there is available data, the higher the socioeconomic status of the authorities, the higher the percentage of self-expenditure1 by the authority on welfare services (Figure 9). As of 2021, the authorities in the lowest socioeconomic cluster did not meet the required 25% matching threshold for welfare services (dashed line in the figure). 

 

Gal, Madhala, and Bleikh (2017) found that many local authorities, due to the need to supplement the budget, initially opt for cheaper services to reduce the required matching contribution. However, in some extreme cases, some authorities are unable to meet the matching requirement at all2. 



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In the field of education, the situation is more complex: the matching mainly addresses administrative positions rather than direct teaching hours3 (Ronen, 2008). Therefore, many researchers prefer to focus on the funding of teaching hours only, excluding the other school-related costs (Beles, Zusman and Tzur, 2016). Teaching hours are funded by three sources: government budget allocated to local authorities, authorities’ own-source revenues, and parental payments. The State Comptroller found that the financial supplementation provided by the government for teaching hours in schools in the lowest socio-economic quintile4 does not match the supplementation provided by schools in high income authorities, together with their own-source revenue and parental payments. This remains true even after additional teaching hours (nurture hours) were allocated in 2014 based on a differential scale (State Comptroller, 2023). 


What needs to be done? 

It is necessary to revise the matching requirements for welfare budgets based on the financial capabilities of the local authorities, or adjust the matching percentages according to service costs, to prevent the prioritization of cheaper services. Alternatively, an agreed-upon mechanism should be established to ensure a high, uniform level of services for residents throughout the entire country (Gal and Madhala, 2022; OECD, 2021a). Furthermore, the number of differential nurture hours allocated to the education system in low-income authorities must be increased to balance the gap created by parental payments and municipal contributions in high-income authorities (State Comptroller, 2023; OECD, 2021a). 

Inequality in expenditure among local authorities due to disparities in own-source revenue 

Inequality of own-source revenue is expressed through the gap between income and expenditure. Sixty percent of local authority budgets are spent on state-mandated services, while government funding for these services accounts for only 42% of total revenue. This means that, on average, local authorities must raise an additional 18% of their expenditure to fund these services. The proportion of these additional funds decreases as socioeconomic status decreases; nonetheless, total expenditure is still higher in high-income socioeconomic clusters, except for cluster 1 (Figure 10). This reliance on local authorities’ own-source revenue results in lower funding for social services in low-income authorities. 



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Most of the own-source revenue is generated from business and residential property taxes (Figure 6). The proportion of revenue obtained from these sources as a share of the total income of local authorities in Israel is similar to the OECD average, standing at approximately 40% of the revenue (Figure 6) compared to 35% on average in the OECD, for countries with a similar governance structure (we compare unitary states that are not federations of states) (OECD, 2021b). However, Israel is characterized by great variability among local authorities in terms of own-source revenue from business and residential property taxes (Figures 11 and 12). Many studies attribute the socioeconomic disparities among the local authorities, among other things, to differences in own-source revenue from business and residential property taxes (Levi et al, 2020; Injaz, 2022; Mufkadi and Shalem, 2018; OECD, 2021a). 



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These disparities are also noticeable when we examine the size of the authorities and their revenues from business and residential property taxes (Figure 12). The average revenue per resident from business property taxes in authorities numbering over 200,000 residents stands at approximately 2,300 ILS, in contrast to approximately 850 ILS in authorities numbering less than 10,000 residents. This disparity is the reason that authorities with low socioeconomic ranking are unable to match their own-source revenue to that of authorities with higher socioeconomic ranking (Levi et al, 2020). According to the OECD, these disparities drive weaker authorities to prioritize the development of large industrial zones, often without any real demand, in an attempt to compensate for the loss of revenue (OECD, 2021a). Simultaneously, low-income authorities struggle to offset the shortfall in business and residential property taxes due to lower collection rates and a high number of discounts granted based on the socioeconomic characteristics of the population (Mufkadi and Shalem, 2018). 



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What needs to be done? 

Reduce business property taxes and reassess the residential property taxes framework. Simultaneously, to compensate for the reduced revenue, the government should increase the subsidies transferred to local authorities for education and welfare while developing additional sources of independent revenue for local authorities (Mufkadi and Shalem, 2018; OECD, 2021a). Implementation of such reforms, particularly, different proposals for adopting property value-based taxation5, require deeper analysis of their potential impact on inequality among local authorities. Moreover, an agreed reform should be introduced to redistribute existing business property tax revenues between low-income and high-income authorities, based on their proximity to industrial zones and contribution to their development (Injaz, 2022; Lahavi and Romano, 2016; Levi et al, 2020).  

High centralization of central government authority 

The central government in Israel is characterized by very high centralization of authority, which comes at the expense of local governance. An international comparison of the governance level at which the budget is managed shows that public expenditure at the municipal level in Israel is one of the lowest in the OECD (Figure 12), indicating little authority. 



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The high centralization of the central government stems from deep challenges faced by local authorities, which have weakened their functionality and led to increased government intervention in their conduct (Ben Bassat and Dahan, 2008). Despite various decentralization efforts over the years aimed at increasing the independence of local government, this centralization has persisted. (Be’eri, 2014). The establishment of “Forum 15”, a coalition of fiscally balanced authorities in Israel, and their transformation into a joint political force6, emphasizes the existing disparities among local authorities. These authorities have increasingly assumed responsibilities that were traditionally managed by the central government, such as public transport routes on Saturdays, management of the COVID-19 crisis and establishment of emergency operations centers during the Swords of Iron War. 

This centralization reduces the efficiency of local authorities in managing their activities and representing their residents vis-à-vis the central government on an individual basis (Ben Bassatt and Dahan, 2008; Levi et al, 2020). The existing intermediate level of governance, in the form of regional clusters, varies significantly in terms of authority and, in most cases, lacks substantial powers (Levi et al, 2020; OECD, 2021a). 

What needs to be done? 

An intermediate, regional level of government authority needs to be created, in agreement with the central government and the local governments. The authority of this intermediate level should include a certain level of fiscal responsibility and an ability to collect taxes around joint industrial zones, which serve as a significant source of own-source revenue (Levi et al, 2020; OECD, 2021a). 

References 

  • Be’eri, I (2014). Local government as a management unit. In: Levi, Y and Sarig, E (eds.) Local government: Between the state, the community and the market economy. Open University. pp. 205-281. [Hebrew] 


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