PA DRAFT BUDGET REJECTED; PA SPENDING CHALLENGED

UNCLAS SECTION 01 OF 02 JERUSALEM 000411 SIPDIS SENSITIVE SIPDIS NEA FOR FRONT OFFICE; NEA/IPA FOR WILLIAMS/SHAMPAINE/STEINGER; PRM FOR PDAS GREENE AND PRM/ANE; NSC FOR ABRAMS/DORAN/WATERS; TREASURY FOR SZUBIN/LOEFFLER/NUGENT/HIRSON; BRUSSELS FOR LERNER E.O. 12958: N/A TAGS: ECON EFIN PGOV KWBG SUBJECT: PA DRAFT BUDGET REJECTED; PA SPENDING CHALLENGED REF: JERUSALEM 143 ¶1. (SBU) Summary: The Budget and Financial Affairs Committee of the Palestinian Legislative Council (PLC) rejected the PA government's draft general budget law for fiscal year 2007. In a January 31 report, the Budget Committee cited unrealistic expectations -- such as assumptions on levels of international aid and customs revenues from Israel, technical shortcomings, and a disregard for legal requirements as grounds for rejecting the draft budget. The report also challenged the legality of continued PA spending and levying in the absence of an approved budget. End summary. ¶2. (SBU) Acting PA Minister of Finance Samir Abu Eisha submitted the draft FY 2007 PA budget to the PLC on January 16, approximately two and a half months after the deadline of November 1, as stipulated in Article 61 of the Basic Law and Article 31 of the Public Budget and Finance Law. The proposed budget totals USD 2.562 billion, including USD 1.2 billion in domestic and clearance revenue and USD 1.362 in external assistance, according to press reports (reftel). The PLC Budget and Financial Affairs Committee received a copy of the draft budget on January 21. (Note: The Budget Committee reviews budget proposals before they are submitted to the full PLC. The PLC must approve or amend the budget by March 31, according to Article 4 of the Budget Law. End note.) -------------- Flagrant Omissions -------------- ¶3. (SBU) In a January 31 report, the Budget Committee concluded that "the draft law in its current form does not constitute a proper basis for discussion and evaluation." The report, signed by PLC member and Budget Committee Chair Salam Fayyad, asserted that the draft budget "fails to abide by the minimum legal requirements that are stipulated in the Basic Law and in other laws and regulations governing relations between the executive and legislative powers in the sphere of financial management." Contrary to the provisions of Article 25 of the General Budget Organization and Financial Affairs Law (No. 7, 1998),the draft budget does not contain a macroeconomic framework. Also omitted is a report from the Finance Minister reviewing the financial policy adopted by the Council of Ministers as well as the core elements of the draft budget. The Budget Committee report stated that these and other "flagrant" and "unlawful" omissions preclude any meaningful evaluation of the draft budget. -------------- Unrealistic Expectations -------------- ¶4. (SBU) The report also cited unrealistic expectations and technical shortcomings as grounds for rejecting the draft budget. The report asserted that, in projecting revenues of USD 1.2 billion, the draft budget failed to consider the impact of the Palestinian economy's steep decline on revenue performance. It noted that in the second half of 2006, total local revenues fell about 40 percent in comparison with the second half of 2005. In addition, the draft budget projected USD 1.365 billion in foreign assistance -- an estimate greatly exceeding what the PA has received in the past -- but failed to disclose any information about assistance received in 2006. -------------- Unlawful Spending -------------- ¶5. (SBU) The Budget Committee report was especially critical of a letter from the Secretary General of the Council of Ministers enclosed with the draft budget. The letter acknowledged serious omissions but requested that the draft law be submitted to the PLC for approval "as soon as possible." The report stated that "the same apparent ignorance of or disregard for the law" is evident when the letter notes that "the government will continue spending and levying pursuant to Article 4 of Law No. 7 of 1998." The report, however, explained that this article postulates the existence of an approved budget for the previous year, and JERUSALEM 00000411 002 OF 002 there currently is none. (Note: The Hamas-led government had previously failed to submit a FY 2006 budget to the PLC. The PLC subsequently approved a resolution authorizing the PA to spend money at the 2005 rate until December 31, 2006. End Note.) -------------- Committee Recommendations -------------- ¶6. (SBU) The Budget Committee recommended in its report that the draft budget be returned to the Council of Ministers; the Council of Ministers be reminded that any spending pursuant to Article 4 of Law 7 of 1998 is unlawful; and the Budget Committee be tasked with preparing a formula for resolving the legal predicament arising from the absence of an approved budget for the previous and current years. WALLES