The Fiscal Trilemma in Israel: Governance and ESG as an Engine for Sustainable Socioeconomic Rehabilitation

In the past decade, Israel has faced a major challenge that parallels to the challenges in many systems around the world – the “Fiscal Trilemma”. The trilemma consists of three conflicting goals: budgetary stability (reducing the deficit and public debt), efficient and tax collection, and the provision of quality and accessible public services, especially in the areas of health, education and welfare. The struggle between these demands, which sometimes contradict each other, directly affects the standard of living, the economy, and governance – both at the state level and at the corporate level.

In this post, I will argue that the solution to the fiscal trilemma in Israel requires a transition from a traditional governance model to an innovative multi-layered model that integrates ESG (environmental, social and governance) principles at both the public and corporate levels. The need to rehabilitate the Israeli North and South is a strategic opportunity for the implementation of this model. The model can serve as an engine for sustainable growth and for reducing social gaps in the country. Such a combination will enable Israel to successfully address the complex challenge of balancing fiscal stability, social justice and economic efficiency.

The Current Fiscal Situation in Israel: Data and Findings

The fiscal trilemma in Israel is well analyzed in the report "Fiscal Aggregates and a New Budgetary Priorities for Israel" by Prof. Karnit Flug, Tzachi David, and Roy Kenneth Portal. The trilemma describes, among other things, the challenge of balancing its three components in the face of a large erosion in public expenditure – as a percentage of GDP. The  state budget for the years 2023-2024 reached a low of 32.6% of the projected GDP, a low level in reference to the OECD average, which stands at about 45%.The large gap between net civilian expenditure in Israel (excluding defense expenditure and interest) and this expenditure in other countries leads to gaps in social services and a sense of disappointment among citizens in Israel. The report emphasizes the need to change budgetary priorities and the importance of focusing on investment in infrastructure, education, and health, especially in the periphery, to cope with the current social and economic challenges.

Israel also suffers from a high level of budgetary concentration: a significant proportion of the municipalities' revenues come from the government. Moreover, there are gaps between the center and the periphery, and these gaps attest to a failure in the mechanisms of division between the government and the authorities, and to a lack of coordination and authority. The need to invest in the reconstruction of the North and South is an opportunity to implement multi-layered policies with goals to build a sustainable environmental, social, and governance model (ESG).

To understand how multi-tiered governance and ESG provide a direct response to these problems, it is necessary to dismantle the existing failure mechanism: today, high budgetary concentration means that the government determines the scope and type of social services provided in the periphery, but it is not intimately familiar with local needs, and therefore resources are not allocated efficiently.

Multi-layered governance is intended to correct this failure by transferring executive, planning, and control powers to local authorities, while maintaining budgetary and strategic responsibility at the national level. In other words, the government is still setting policy, but implementation is adapted to the field. For example, in Scandinavia, education, health, and transportation are managed at the local level, but budgeted at the national level according to differential distribution formulas. Moreover, ESG principles are not a conceptual addition, but rather a useful tool for managing and measuring social and environmental performance. They can be used to define and monitor clear indicators such as average travel times to health services, the rate of participation in early childhood education frameworks and the level of public investment in disadvantaged areas. Once the government, local authorities and corporations are committed to publicly reporting this type of data, a data-based control system is created that allows for the identification of gaps, the setting of priorities and the intelligent routing of resources. Thus, the integration of ESG principles improves public service, increases transparency and enables more effective management of local social and environmental risks.

Each of the three components of the trilemma carries a critical weight: a balanced budget is the basis for macroeconomic stability and it lowers risk to the economy. Fair taxation ensures efficient and fair budgeting of public activity, and quality public service is a socio-economic necessity that leads to growth and ensures equal opportunities. But in Israel's economic reality, which is expressed in deep inequality and budgetary difficulties, the trilemma becomes particularly problematic. Proper management of the trilemma requires strong public and corporate governance that is capable of operating with full transparency, accountability, and based on long-term planning and innovation in risk management. Without quality governance, the trilemma threatens to weaken stability and damage social resilience.

Public Governance in Israel: Challenges and Solutions

Public governance in Israel faces structural challenges: from the division of powers between ministries, through the lack of transparency and efficiency in budget control, to the difficulties in implementing long-term changes. Still, corporate governance – part of the economic economy – must come into play by implementing ESG (environmental, social, governance) principles in business management. Investing in ESG aspects improves transparency of operations, reduces risks, and increases social and environmental responsibility – thus helping to create trust and market positioning.

Social inequality in Israel, especially in peripherals such as the north and south, is a clear manifestation of the trilemma's failure. Widespread gaps in income, health services, and education increase the sense of alienation, impair social mobility, and prevent great economic potential. A weak health system in the periphery is characterized by low life expectancy and poor quality of life, and education systems with few resources. They harm the economic opportunities of the future generation.

Public service is the bridge between budget policy and the needs of the citizens, and therefore it must be of high quality and equitable, otherwise public expenditure is liable to be wasted and useless. The business sector, especially in its activity in the periphery, can and should also participate actively in reducing the gaps, not only through limited corporate responsibility, but also through systematic contribution to community development, a broad ESG strategy. For example, we can see regional ventures in which corporations collaborate with local authorities, government ministries, and communities to promote employment, education, and technology. Partnerships of this type illustrate how corporations can transform from external actors into strategic partners in the fabric of socio-economic governance and contribute to strengthening local resilience over time.

The Solution: Implementing ESG Principles and Multi-Layered Governance

International studies categorically state that high-quality and equitable investment in education and health in the periphery, along with high-quality physical and managerial infrastructure, increase productivity, increases social mobility, reduces income and health gaps, and increases public trust in institutions. And not only that: it is emphasized that the quality of governance, which is expressed in transparency, accountability, and public participation, directly affects the success of fiscal policy, inter alia by improving the efficiency of the budget and its social efficiency.

The reconstruction of the North and the South is not just a socio-economic need – it is a strategic opportunity to design a sustainable model of governance, ESG, and economic growth. To succeed, an innovative public governance model is needed that combines digital technologies for transparency and monitoring, high accountability, and civic involvement indecision-making mechanisms.

In addition, the government must promote economic incentives and involve the private sector and the third sector in social and environmental initiatives to increase the scope of investment and ensure long-term economic resilience. For example, governments in countries such as Germany have shown that the implementation of multi-layered governance methods, along with targeted incentives in the periphery, yields optimal results: they reduce inequality, increase employment, and promote economic growth and quality services in disadvantaged areas.

Multi-tiered governance is a method of cooperation and division of powers and responsibilities between three entities: the state, local government, and non-state actors (such as civil society, the private sector, and academia). A local example of the realization of the principles of multi-layered governance is the activities of the Negev Development Authority and the Galilee Development Authority. These authorities promote projects in the fields of employment, infrastructure, and education in the periphery, and have cooperated with government ministries, local authorities, the business sector, and the civil society – thus implementing the principles of multi-layered governance.

This concept of governance enables better adaptation of infrastructure to local needs and improves the efficiency of public investment. In terms of social equality, it contributes to a precise response to peripheral gaps and disadvantaged groups. In terms of productivity, it strengthens coordination between employment, transportation, and education systems at the local level. In terms of transparency, it increases civic involvement and public trust in institutions.

Economic analyses show that a lack of sufficiently high investment in the periphery could lead to a slowdown in productivity, a decline in growth, and increased inequality. All of these weaken the stability of the economy. In contrast, combined investment in improving education, health, and infrastructure systems increases the productivity of the population and enables sustained and stable growth. In recent years, studies have emphasized that this is not only a matter of specific economic improvement, but also the creation of more equal opportunities for the entire population.  Opportunities that lead to greater social mobility and a reduction in gaps in society.

Implementation Challenges and Practical Methods of Implementation

At the same time, it should be recognized that these proposals, in the form of multi-layered governance and the implementation of ESG principles, are not without implementation challenges – both on the political and operational levels. First, the division of powers between the government and the local authorities requires a profound structural change, including legislation that establishes mechanisms of responsibility, budgeting, and coordination. The development of planning, measurement, and analysis units at the local level will be required, alongside administrative infrastructures that do not exist in most of the municipalities in Israel. This is a complex process that requires not only resources, but also training, accessibility of distributed data, and inter-ministerial cooperation (a field that in Israel often encounters bureaucratic difficulties).

Second, the implementation of ESG in the public sector is nota trivial matter. Mandatory reporting requires supporting information systems, institutional incentives, and professional guidance to ensure that the indices do not become just another report. ESG indicators should be integrated as an integral part of the decision-making process: for example, linking the budgeting of a local authority to an improvement in health transportation accessibility indicators or investment in disadvantaged populations.

Third, there is a fundamental political constraint: in order for such a model to mature, government continuity and multi-year budgeting are required. Without them, such initiatives are liable to get stuck in the way, especially politicians, bureaucrats, and the public believe that they depend on short-term political will or a single term of office. Therefore, broad agreements between government ministries, local authorities, corporations, and civil bodies must be formulated at an early stage, and concrete practical goals must be set (e.g., a selection of several ESG indicators that will enter current budgetary use as early as 2026).

Effective management of the fiscal trilemma therefore requires not only budgetary balance, but also data-based public and corporate governance. Public governance includes transparency, tight budgetary control, multi-year policy planning, and inter-ministerial collaborations. Corporate governance requires ESG reporting as an institutional obligation and management of social and environmental risks as part of the business strategy. It also requires active contribution to social development in the periphery, in cooperation with the government and the third sector.

Conclusion and Recommendations

The fiscal trilemma in Israel is more than a budgetary challenge – it is a test of the degree of governance and the ability of the leadership to lead sustainable socio-economic change. The trilemma emphasizes the need for a precise balance between economic and social goals, strengthening public and corporate governance, and implementing ESG principles to ensure sustainable economic growth and reduce social gaps.

The combination of strong public governance, corporate responsibility through ESG principles, and the opportunity to rehabilitate the periphery allows not only to succeed in the budget balance, but also to promote a more equitable society and stable growth. The government, the business sector, and academia must cooperate to promote governance reforms, invest in the periphery, and encourage an ESG culture at all levels of management. The key lies in strategic leadership, leadership that is willing to take responsibility, innovate, and act for the common good. Only in this way can we turn the trilemma into a real opportunity for rehabilitation and growth.

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Yair Avidan, Chair of the Advisory Committee, Arison Center for ESG, Reichman University