This article attempts to analyse the characteristics, the means of implementation, and the role played by Israeli state audit when examining the stabilisation plan for the Israeli economy as it was carried out in the course of 1985.
Israel, has been struggling for many years, both in economic and social terms, with the destructive consequences of inflation. At the beginning of 1983, it introduced a series of mechanisms, unique to a certain extent, to cope with inflation. Sharkansky, described the characeristics of inflation "is neutralized somewhat by means of the use of the consumer price index and a range of other distinctive indexes, to link incomes and payments to the rate of price increases. Quarterly adjustments of the cost of living on wage and salary slips have become common practice. Savings schemes, mortgage payments and other loans, income tax scales, insurance contracts, municipal rates and services, fines and other court sentences are all linked to the consumer price index. The value of the Israel Shekel in comparison with foreign currencies is in a permanent process of devaluation, so that the cost of imports rises in terms of shekel prices. The gross national product rose at a rate approaching the growth of the government's budget. Personal income rose parallel to the rise in the consumer price index, but it is clear that there is no perfect adjustment among the different indexes and thus, at least temporarily, a number of groups lost while others gained in terms of buying-power. As a rule, at all events, the cost of goods and services tends to remain steady, in real terms, for some length of time." (In Friedberg, 1987: 187)
In analysing the significance of these characteristics, Sharkansky pointed out that the situation described above as it was at the beginning of 1983 brought about "a rise in one price system to be followed by rises in other systems, running parallel with the rise in the level of income and with the rise in the monetary value of the country's currency, which has to be paid to creditors abroad. Evidence to the fact that inflation is a negative phenomenon appears in the public reports of the State Comptroller and the Bank of Israel. However, the decision makers determining the policy are not subject to a real feeling of pressure in favour of imposing draconian curtailments on the economy, and on the whole, a strategy of accommodation is adopted rather than a head-on confrontation with inflation". (Sharkansky, ibid).
Researchers and experts foresaw already in 1981 and 1982 - at a time when the mechanisms of coping with inflation seemed to meet the needs - that a serious crisis was in offing. It would appear, however, that the governmental assessment at that time did not conceive of a drastic inflationary deterioration. The attitude of the State Comptroller according to which "a public administration worthy of its name must adjust itself to the dynamics of a given situation and give a fitting response to what was happening' (State Comptroller's Annual Report, 1983), did not find suitable expression in government echelons with regard to inflationary developments. The State Comptroller drew the writing on the wall at the time by stating that 'in this way the public sector deficit kept on growing and this is how the country's need for internal and foreign loans keeps on increasing, and among them short-term loans, which meant a heavy burden on the budget of the coming years and on the country's economy and its consequences -an acceleration of the spinning pace in the vicious circle of inflation." (State Comptroller's Annual Report, 1983).
When the crisis erupted in 1984 and 1985 and took on frightening national dimensions, and when 'The Economic Stabilisation Plan' was decided upon, state audit too was required to deviate from its routine activities and was called upon to examine this plan. The traditional conception of state audit in Israel and also in most Western Countries, which is characterised by a certain distance from the events taking place and by their being examined after the fact (post-audit) (Geist, 1981: 11-13), was not in accordance with what was required from state audit in so critical an area. In this connection, the State Comptroller declared in mid-1983, when the storm clouds could already be seen on the horizon, that "State Audit must also follow actual events and occurrences while they are taking place and to accompany them already in early stages." (Annual Report, 1983).
This approach of the State Comptroller was applied in examining the 1985 'Stabilisation Plan for the Israeli Economy.' Use was made of advanced audit methods which had become necessary due to the complex and intricate situation of carrying out an audit on a subject of nationwide interest under conditions of three digit inflation.
The early years of the eighties were characterised by rapid, three digit inflation. In the financial year of 1980, the consumer's price index rose by 134 percent, in 1981 by 110 percent, in 1982 by 127 percent, in 1983 by 174 percent, and in 1984 by 405 percent. One of the principal causes for the rising inflation was the country's budget and the part played by the governmental-public sector in the overall activities in the economy.
The helmsman of the economy came in the course of the 1984 financial year to the conclusion that inflation, of the dimension that was reached in that year, represented a danger to economic stability and was liable to cause irreparable damage both in the economic and the social spheres. One of the most serious phenomena during that period was the self-fulfilling anticipation of galloping inflation, leading to further expectations on the part of the public. These expectations were among the factors which prevented inflation coming to a halt.
Attempts were made in the course of 1984 to curb inflation, inter alia, by concluding two 'package deals', but this was not enough. There was indeed some cooling down of inflation, yet the steps taken were not sufficient. More drastic steps were required, and these were taken in July 1985. On July 7,1985 'The Economic Stabilisation Plan' was launched, which included the following essential steps: devaluation of the rate of the Shekel against the Dollar, a general freeze on prices effective by law, a substantial cut in the country's budget and in the public sector as a whole, as well as a cut in the manpower employed in the public sector. The plan achieved, in part, impressive results in curbing inflation, cutting the budget and in improving the general atmosphere.
When the decision on the implementing the economic plan was made, the State Comptroller's Office organised, on a parallel plane, the carrying out of an audit on the actual implementation of the plan. The Directorate of the Office at the time decided to carry out an audit on the two major elements of the economic plan: the cut in the budget and the cut in manpower. The aim was that the audit's findings would be published in the 36th Annual Report which was to be completed on February 15, 1986, that is to say only about seven months after the decision to implement the economic plan.
While the audit was being carried out several aims were emphasised which had not found conspicuous expression in audits of previous periods: (Caiden in Geist, 1981: 138-140)
In matters of state audit it is usual to distinguish between two kinds of audit assignments: (State Audit Manual, 1987: 50; Geist, 1981: 17; Stats, 1976):
Specific audit assignments are intended for one definite area of activity and are generally conducted by one or two auditors.
'Horizontal' assignments encompass a large number of audited units simultaneously and are conducted by several audit departments and a relatively large number of auditors. The problem with this kind of assignment is to ensure a similar rate of progress in carrying out the audit and in identifying the general characteristics as a result of the light shed by the findings on the different bodies that were subjected to the audit, and this in spite of the variegated manpower employed in the audit. Examining the implementation of the economic stabilisation plan was, as aforesaid, a wide ranging assignment on which a relatively large number of auditors were deployed in order to cover all the government ministries in a relatively short time.
The challenge facing the audit was how it would be possible, in a working span of three to four months, to receive budgetary data from all government ministries which would be sufficiently well founded and valid, so as to be able to arrive at reliable findings on the implementation of the economic stabilisation plan.
The audit used for this purpose the method which may be described as 'audit by exception', which is similar in its basic conception to the method of management by exception (Brink and Witt, 1982: 748-50). This method lays down that for the purposes of decision making process, only the information of an exceptional nature needs to be analysed and examined. Thus, a lot of time can be saved in the examination of information which is not exceptional.
Use was made of the financial data in the Accountant-General's Branch of the Ministry of Finance which had been prepared by means of computer. This procedure made it possible to receive temporary data on the actual implementation of the budgets in the government ministries, generally up to the end of October 1985, as compared to the updated budget and taking into consideration the cuts imposed on the budget. Computer reports were obtained from the Accountant-General concerning budgetary plans in which there had been a striking deviation in implementation compared with the approved budget. In this manner the audit's attention could be focused on the deviations alone, and a great deal of audit time could be saved; it was, thus, possible to deal with a large number of bodies, in a wide ranging fashion, in a relatively limited space of time.
This audit, which was concerned with findings relating to deviations from the approved budget, had to be based on half yearly financial data which were not of a final nature. State audit dealt with this matter by stating:
"A large part of the audit findings relates to activities which were carried out in the course of the financial year 1985. At the time of the completion of this report, the financial year 1985 has not yet come to an end, and it was obviously not possible for the audit to base itself on a final financial report."
"These data are only temporary, since they have not been confirmed by a final examination, as is customary when a final financial report is drawn up. The temporariness lies in the comparison of a half-yearly performance as opposed to an annual budget. One must also take into account that there are cases where implementation is seasonal and cannot be spread evenly over the whole financial year, and one has, therefore to be careful in drawing conclusions."
"However, these temporary data do offer some possibility of drawing preliminary conclusions on the implementation of the economic stabilisation plan as far as aspects of the budgetary and manpower cuts are concerned. More unequivocal conclusions can only be drawn at the end of the financial year.
The audit findings point to the fact that these basic conclusions, too, carry a very substantial weight and are likely to be an important component when it comes to drawing conclusions on the implementation of budgetary cuts in the past and thus also to serve as a guide in the decision making process on future cuts in the Israeli economy." (Annual Report 36).
At this stage, a series of additional limitations should be emphasised which faced state audit when it came to examine the implementation of the approved budget, as well as the reduction in manpower, under the conditions of galloping inflation which prevailed at the time of the audit. Caiden and Wildavsky (Caiden and Wildavsky, 1974: Chap.3) pointed to the characteristics inherent in conditions of three digit inflation and among them: the annual framework of the budget turns into a recurrent budget amid conflict between the Ministry of Finance and the other ministries and the operational units due to the procedure of allocating ill-defined and vague resources; the ministries involved in the budgetary process uncover different and eccentric ways in order to gain advantage and to protect their portion of the budget from the national pie; the collection and publication of information are harmed and turn out from time to time to be unreliable; the ministries involved in the process do their utmost to get possession of resources outside the control of the Ministry of Finance, and the Treasury on the other hand goes out of its way to withhold, to blur, and to conceal information concerning the scope of resources allocated to government ministries and to other units; there is a gap between the 'genuine' budget, known only to a few, and the official budget; the real rate of inflation is sometimes 'hidden', and other important data also suffer from a multitude of meanings.
Although these characteristics are the concern of poor countries, the reader will not find it difficult to locate some of them in the Israeli scene during the period discussed in this article. Add to this, the series of manoeuvres indulged in by government ministries and other units in their struggle to increase their slice of the budgetary cake which stood at their disposal - manoeuvres which are ever so significant under conditions of galloping inflation - and parallel with this Treasury's counter-manoeuvres (Sharkansky in Friedberg, 1987:192-198), perhaps then it will be much easier to understand the limitations and difficulties which faced state audit when it came to examine the implementation of the approved budget according to the 'Economic Stabilisation Plan'. When talking about manoeuvres, we are concerned with matters such as : swelling the budget, early expenditures delaying income reports; reducing the quality of goods and services to the public; loans outside the governmental framework; searching for donors, etc. The Ministry of Finance did of course, not lag behind and indulged in counter-manoeuvres, such as: delay in expenditure; pressure by means of cuts and freezes; basing itself on expert opinion for the assessment of expenditure budgets and their implementation of various kinds of plans; delay in reacting to the request of ministries, etc.
A. Reduction in Manpower : In order to examine the reduction in manpower, which was sought by government decision, computerised data were also received from the Civil Service Commission. These data made it possible to draw a comparison between the maximum authorised employment of manpower and the actual state of employment. The data which referred to a five point timescale between April 1984 and December 1985 enabled one, by investing a relatively small amount of audit time, to draw general conclusions regarding the employment of staff in all government ministries at that period of time, as compared with the maximum permitted number of staff.
The system of data collection also made it possible to receive centralised computerised data in respect of large governmental units which paid their staff for overtime in 1985 and to compare it with 1984.
The following is a summary of these findings: 'It transpires from the data of the Civil Service Commission, that up to October 1985 eighteen of the thirty-three units reported upon, exceeded the manpower allocation fixed for them. From the information gathered on the units which deviated from their maximum manpower allocation in October 1985, it was found that the maximum manpower allocation amounted to 20,486.5 posts, whereas in actual fact 21,521 members of staff were employed, that is to say 1,034.5 more than authorised. The data point to a reduction of 1693 members of staff employed, i.e. 3.9 percent, in December 1985, compared with April 1984. This decrease may be looked upon as an achievement of the manpower reduction plan, but there is-yet a great deal to be done to reach the aim in full'. (Annual Report 36).
The State Comptroller summarises the audit findings, relating to the connection between reduction in manpower and cutting the budget by stating: "Parallel with the decision on the reduction in manpower of the economic stabilisation plan, an immediate cut in the budget allocations which are at the disposal of each ministry was put into effect in accordance with the cut in manpower which had been imposed. Since the ministries did not carry out the dismissals at once, as has been pointed out, a situation was created in which, until these steps were taken, most of the ministries exceeded their budgetary allocations. These deviations, in no small measure, could in fact not be controlled by the ministries, since it was highly reasonable to assume beforehand
that the dismissal of staff would not be carried out immediately after the decision to that effect had been taken. Unrealistic budgeting no longer makes it possible to use the budget as an instrument for budgetary control and inspection and as a tool for outlining policy." (Annual Report 36).
B. Deviations from the Budget: The conclusions drawn by the audit concerning the deviation from the budget were based principally on an examination of the reported deviations, by comparing the half-yearly implementation for 1985 with the approved and cut budget for that same year. The audit brought to light many deviations from the budget as follows;
'Many ministries deviated from implementing the approved budget. This applies also to 1984 for which there are final data as well as to 1985 for which there are only provisional data. Not to adhere to the budgetary framework is enough to detract essentially from the cut in the budget which was implemented by the respective ministries.
The deviations in the budgetary plans reached in some of the ministries more than 100 percent already in the course of 1985. Even if post factum budgetary approval is received in respect of these deviations, either by means of an additional budget allocation or a budgetary transfer from another item, there is no reason whatever to waive the demand for sticking to the budgetary framework' laid down in advance, and not to indulge in activities for which there is no authorsed budget at the time of their execution. (Annual Report 36).
C. Closing of Units: The economic stabilisation plan included, for the first time, a cut in the budget accompanied by the closure of specific units or their merger with other units. It was, therefore, of interest to check whether this cut was actually carried out or whether it too was cancelled for one reason or another. On this topic the State Comptroller stated :
'The cut in the budget which accompanied the economic stabilisation plan led to an at tempt in some of the government ministries to bring about a real cut in their activities by way of closing budgetary units and their merger. It turned out that when the time came to put the decisions into practice, problems arose which prevented the actual implementation of the decision either entirely or for a few months. A striking example in this respect may be found in the Ministry of Health which took the decision to close a geriatric hospital and two schools for nurses and to unify them in a health centre with the hospital. None of these decisions was carried out before December 1985.' (Annual Report 36)
The following is a specific example relating to this subject:
The Hospital for Chronic Diseases
According to the budgetary law for the financial year 1985, the budget for the hospital amounted to a total of around 1.5 billion Shekels. The number of beds in the hospital was 120. The maximum labour-force in the hospital stood at 134.5 positions. The hospital was not big, but costs were high, and for a number of years the Ministry had reached the conclusion that it had to be closed.
Within the framework of the decisions concerning the cuts in the ministry's budget, the ministry decided to close the hospital. At the beginning of November 1985, about four months after the decision on the cut, the Ministry of Health decided not to close the hospital, but to reduce the hospital's budget in manpower and activities by changing its beds from rehabilitation beds to beds for geriatric and chronic patients. It was thus decided to acquire an additional twenty-five beds for geriatric and chronic patients to the hospital's complement, so that it would be possible to move the additional twenty-five beds, it was also decided to carry out an additional renovation in the place. Up to the time of the audit in the middle of November 1985, the hospital continued to operate at full scope and on a scale which had been laid down before the cut.
These findings of the State Comptroller point thus to the flaws in the decision making process concerning the cut in the budget. Contingency plans were also not prepared for the implementation of a budget cut, although for months a lot had been said about the need for such a cut.
D. The quality of Budgeting: The examination of the deviations, which were obtained by comparing the cut budget with the half-yearly implementation in all government ministries, made it possible to draw certain conclusions with regard to the quality of budgeting in the government ministries. State audit stated : "In a number of ministries in which deviations in performance were brought to light when compared to the budget, these deviations were explained by unrealistic budgeting for a large part of the system, so that it was not possible, in the words of these ministries, to keep within the constraints of the budget which had been allocated to them for their activities."
These pehnomena required at least a thorough examination of the arguments raised on the subject of unrealistic budgeting, so as to prevent repetition. Alternatively, to the degree that these arguments were insubstantial, strict adherence to the approved budget should be required.
E. Avoidance of Effective Budget Cuts: The application of the budget cuts brought about by the economic stabilisation plan took some government ministries to the point where they attempted to find ways and means to avoid an effective budget cut by postponing activities to future years or by implementing the cut through the development budget. These activities of the ministries found their expression in the audit's findings, as follows :
"Postponement of Activities: The government decision of 1 July, 1985 laid down that reduction in the budget must not be implemented by way of postponement of activities. This decision was not always upheld. The Ministry of Health, for instance, did not actually cut down on its building projects which were in progress, but took measures which postponed the commissioning of work due for the end of the year to the following financial year. In this way, the cut did indeed appear in the books, yet it was not a genuine cut in activity. The Ministry of Labour and Welfare did not deviate from its budget in 1984; the audit, however, brought to light that the ministry postponed payments in the region of 3.2 billion shekels from 1984 to 1985."
"Development Budgets: The cut in the budget, which had been requested of the government ministries for years, brought the ministries in many cases to propose a large cut in their development budgets, and thus a smaller cut in their regular budget was requested. In this way the implementation of the development budget in 1984 and in the first half of 1985 reached very low levels in a number of minis tries when compared with the updated budget, and it was therefore possible from time to time to balance deviations from the Minis tries' regular budget
"A cut in the development budget itself is indeed enough to lead to a reduction in government expenditure during the year in question and to achieve its aim, but it is not enough to bring about a change in the structure of the public economy which could have been attained by a cut in the regular budget. The cut in the development budget can be implemented fairly easily, but offers no solution for the future." (Annual Report 36).
The audit which was conducted on the implementation of the economic stabilisation plan, approved on 1 July 1985 was unique in its conception, its scope, as well as in its timing. One may identify in this audit a number of highly interesting characteristics:
The audit was conducted almost in 'real time'; that is to say as near as possible to implementation. Thus, those conducting the audit were faced with the notable challenge to arrive at conclusions before the process was completed. An audit of this type is sometimes of great advantage, since it enables the audited body to sense the existence of the audit close to the events occurring, and thus make it possible to correct shortcomings while the process of implementation takes place. This was the realisation of the principle of what is called 'audit presence'. There is reason to believe that the very 'presence of the audit' during the process of the plan's implementation contributed to the prevention of additional shortcomings on the part of the audited body.
In the audit discussed here, wide use was made of audit by computer which made it possible to conduct 'audit by exception'; thus, audit time was confined to the examination of deviations. In this way a considerable amount of audit time was saved which could be devoted to the identification of the deviations and to the ascertaining of the findings.
The audit under discussion also dealt directly with the decision making process concerning the cuts and with the need to implement these decisions. It can be assumed that the conduct of the audit concurrent to implementation can serve as a tool in the hands of the decision makers when they come to properly assess performance in each ministry; at times one may also be able to draw the necessary conclusions in the course of the process with a view to improving implementation.
The analysis of these characteristics makes it possible to point to a number of principal issues with which the state audit had to cope when examining the economic stablisation plan:
Researchers foresaw already in the mid-seventies and in the course of the eighties that progressive state audit in different countries would be faced with weighty problems when it came to carry out its tasks. (Friedberg, 1985: 20-23) Some of the basic problems which the researchers indicated covered the scope of the audit, the range of its activities, its working methods, its closeness to the actual occurrence of events and the use of advanced tools (such as computers). It turned out that most of the above mentioned problems did indeed confront state audit in Israel where it set out to examine the economic stabilisation plan; the data show that it coped with them successfully.