McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. CHAPTER 8 The Performance of the Fiscal System

6-2 The Performance of Local Authorities Gaza Strip :  The size of budget expenditures for all local authorities was: $1 Million – 1968 $15 Million – 1980 $29 Million – 1987  Budget was divided into : 1- Regular budget 2- Development budget : 9% - 43% as maximum

6-3 The Performance of Local Authorities Gaza Strip: Revenues are divided into : 1- Ordinary: ordinary budget includes taxes, fees, and rates. Its average was 26% 2- Establishment revenues : the average was 46% 3- Development revenues : the average was 46%  The municipal budgets was 70%, village budget was 25%, and local committees was 5% in Gaza strip in  50% of budget for Gaza City

6-4 The Performance of Local Authorities Al-Quds : Some alternatives to estimate the situation in East Quds : 1. The financial data of Nablus was used municipality to determine the trend of Al-Quds budget. 2. Estimation of the share of East Quds to the total annual budget of the whole Jerusalem, according to the number of Arab citizens, is about 29%. 3. Separation of the financial data related to Arab citizens according to their residency location.  98% of Arab citizens are living in specific sub-quarters.

6-5 The Performance of Local Authorities Measures : A- Comparing between local and central size of public services. B- Comparing between government expenditures and total consumption. C- Comparing between the size of government consumption and the annual gross domestic product (GDP) at market price. D- Comparing between the situation in Palestine and other countries concerning the contribution of government budget in total consumption.  The municipal budgets was 74%, village budget was 24%, and local committees was 2% in West Bank.

6-6 The Performance of Local Authorities Ratios between government current consumption and total final consumption and the GDP in Palestine (1968 – 1988) indicates that :  10% government consumption Vs. 90% private sector.  Contribution of government consumption to the GDP is 12%.  While it was 39% in Canada, 41% in Germany, 42% in UK. Palestine Vs. Jordan: The total government expenditures:  $463 million in 1980, $87 million in 1977, and $328 million in 1975 in Jordan compared to $135 million, $87 million, and $68 million respectively for the same years in Palestine.  The contribution of government budget to GDP in Jordan was about 35% compared to 12% in Palestine.

6-7 The Performance of Local Authorities Expenditure per-capita ( ):  Current expenditures per-capita was about $29 in 1968, it increased to $108 in 1980, to $150 in 1986 and to $173 in  This amount is so small compared to an average of $1750 in Israel.  Government budget expenditure per-capita in Palestine is less than all other Arab countries.

6-8 Public Finance and the Process of Capital Formation Some ways to calculate the contribution of government capital expenditures in gross capital formation : 1. National Accounts = Imported Machinery & Vehicles + Development budgets of central and local authorities. 2. National Accounts = Current revenues – (current expenditures + capital transfers from abroad + foreign and local loans)

6-9 Public Finance and the Process of Capital Formation Contribution value of central and local government in capital formation (1968 – 1988) indicates that :  Government sector contributed to capital formation of about $9 million in 1968, $31 million in 1980, $59 million in 1987, but it was decreased to $ 49 million in  The main capital formation was allocated to school building, health facilities, telephones, and road.  The contribution of local authorities to capital formation was related to projects inside council areas as utilities establishment, roads and buildings.

6-10 Public Finance and the Process of Capital Formation Several measures used to assess the role of government budget: a) To indicate the share of public contribution to the total capital formation. b) To compare it with the annual GDP of Palestine. c) To calculate the government capital formation per-capital formation. d) To compare it with the other Arab countries. e) To indicate the composition of capital formation elements produced by the central and local government budget.

6-11 Public Finance and the Process of Capital Formation Total capital formation values and gross domestic products among the government share in capital information ( ) indicates that:  The gross total capital formation was $39 million in 1968, it increased to $233 million in 1975, to $337 million in 1984, and it became $422 million in  The contribution to capital is insignificant comparing to the private sector.  The share of government budget including central and local budgets to the capital formation was so immaterial and did not exceed 4% of the gross domestic product value, with an average of 2.5% a year of the total GDP over the period  The public capital expenditures per capita ranged between $10 as it was in 1968 and $41 as it was in 1987, with an average annual per- capita of $23

6-12 Public Finance and the Process of Capital Formation Comparison - Palestine Vs. Jordon :  The size of public capital formation in Palestine is only 8% of the capital formation in Jordan as it was in 1975 and 6% as it was in 1977, and 12% as it was in  The public capital formation in Jordan was $213 million in 1975, $345 million in 1977, and $258 million in 1980, compared to $16 million, $20 million, and $31 million in Palestine respectively.  The capital expenditures per-capita in Palestine was less than 9% of the capital expenditures per-capita in Jordan, 7% of Syria and 6.5% in Bahrain.

6-13 Public Finance and the Process of Capital Formation The composition elements of capital formation are : 1. The acquisition of land: limited to local councils. 2. Increasing of reserves: limited to central government budget. 3. Equipment machinery and vehicles: central and local budgets. 4. Roads: limited participation by the West Bank budget. 5. Buildings: central and local budgets. 6. Water projects: very limited number of projects. 7. Utilities establishment projects of municipalities and councils. 8. Other items: such as infrastructure planning, electric grids etc. Note: The roads and public buildings are the major components of capital formation as provided by both the central and local budgets.

6-14 The Present Fiscal System “The budget policies of the occupation authorities further depress conditions in the Palestinian sector, in the absence of a central economic planning authority, there is no promotion of capital formation aimed at encouraging growth and the budgetary policies of the Israeli authorities illustrate freeze characteristic of official policy".

6-15 The Present Fiscal System Does the present fiscal budget meets any of the functions of public finance, or whether it serves any of the economic aspects of Palestine, other than maintaining order and offering the minimum level of public services ?  The Answer is No

6-16 The Fiscal System Why?? First: There was no official nor non official economic plan. And there was no complete nor partial framework for the main economic policies. Second: Budget, it is considered as a security matter and not published or announced to the related parties, and it is a job of the military officer and other Israeli staff. Third: Budget lists up to 30 different items, each of these items represent a governmental unit regardless of it's size and function. Fourth: The statements budgets are not available to the bureau of accountancy who must report periodically about the implementation process of the budget as stated in the existing budget laws and rules. Fifth: The public services units and departments have to get an authorization from the military officers every time they want to spend their annual allocations. Sixth: The budget classification in Palestine does not follow any standard form of economic, functional or level classification schemes.

6-17 The Fiscal System Israeli officers claim that all taxes collected from the Palestinians didn’t transfer to inside Israeli government budget- true.  Claims of Israeli government are not true, especially, when considering major items such as: A. The value added taxes and customs duties imposed on the Palestinian imports. B. The deductions on the wages paid to the Palestinians working inside the green line. C. The paid taxes by the Israeli settlers located in Palestine, D. The traffic violations and military fines. E. The fuel tax. F. Other benefits from the land and water resources.

6-18 The Fiscal System Revenues indicate that not all local revenues collected from the Palestinians in Palestine are allocated to the Palestinian economy: First: The deductions from workers were included in Palestine budgets three times during the period, and questions arise about the other years' collections which may be estimated to be $500 to $800 million for the period from 1970 to 1989, these have not been transferred to Palestine budgets. Second: The value added tax and the import duties on imported goods by the Palestinians are estimated to be about $ 80 million a year. Third: according to the existing laws, the fuel oil tax and traffic fines are supposed to be collected and transferred to municipalities, but they never transferred the traffic fines and lately stopped transferring the fuel tax for many municipalities.

6-19 The Fiscal System To analyze the use of governmental budget as an instrument of economic, the following facts may be pointed out:  The central and local government budgets have relatively limited roles in creating jobs.  The local budgets allocate almost half of their budgets in Palestine to pay salaries for employees.  About 68% of the central budget was paid as salaries to employees working mainly in education, and health services.  The total government employees were about 17,500 in  Both central and local governments employed about 24,500 employees who formed about 8% of the total labor force in Palestine, and 15% of the total labor force.  Creating the annual new jobs in local and central government is very limited to about 700 jobs a year.  The central or local government budget has no effect on creating jobs through economic and infrastructure projects.

6-20 The Fiscal System Second: the government budget has no role in allocating resources to various areas of the economy due to the following facts:  There is no real state budget in Palestine.  There are no published rules, regulations or standards which may regulate preparing and implementing the Palestinian budget, by which it may be tested or evaluated.  The present Palestinian budget is treated by the occupying Israeli authorities which prepare it as a unit budget that follows the ministry of the Israeli defense budget rather than a government budget for independent territories.

6-21 The Fiscal System Careful investigation of the practices of the military authorities in the last years indicates that:  Military officers state the levels of expenditures are mainly related to the payroll of civil employees plus few capital items expenditures.  The military authority raised the tax rates and imposed new taxes during the Intifada retroactively, whenever they feel they can not collect the sated budget, and regardless of the existing economic and social situation in Palestine. E.g. Imposing of the Intifada tax on all Palestinian vehicles from 1985 to 1991.