Finance Committee defers vote on mandatory spending cuts

March 3, 2014 18:38

Under current law, the limit budgetary spending is allowed to increase based on a rolling average of the last ten year’s economic growth.

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The Knesset.

Knesset 370. (photo credit:Marc Israel Sellem/The Jerusalem Post)

The Knesset Finance Committee on Monday deferred a vote to change the budgetary spending limit, a change that would curtail spending significantly and require cuts.

Under current law, the limit budgetary spending is allowed to increase based on a rolling average of the last ten year’s economic growth, which in 2015 would come out to a 3.8% spending increase.

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The proposed law would change the method of calculation to one based on how far off Israel’s debt-to-GDP ratio is from its goal, which in 2015 would bring the limit down to 2.6%, requiring billions of cuts in planned spending.

“The government decided to give a death blow to the welfare state, as it continues to break its promises to voters,” said Labor MK Michal Biran, who led the assault on the change. “If civilian spending is currently the lowest in the OECD, except for South Korea, by the end of the decade we will surely close the gap.”

Proponents of the change noted that lowers spending meant the government would not be forced to raise taxes by the equivalent amount in order to hit its deficit target.

“The process will balance between the growth of expenditures, which will allow an increase in the standard of living, and on the other hand will prevent a drastic increase in taxes,” Finance Ministry budget director Amir Levy said.

As is, he said, tax revenues are expected to be 1.7% lower than expected by the end of the decade. With future growth expected to be close to 3% in the coming years, versus 4.5% growth in previous years, the old method of calculating increases would be skewed upward.

Even the new system would allow spending per person to continue growing, but reduce Israel’s debt. That, Levy argued, would in turn would reduce interest payments, which he likened to throwing money in the trash.

Israel’s moves to reduce its debt have cut its interest payments from NIS 80 billion to NIS 40 billion over the past decade. That, he said, was a better way to ensure continued spending on Israel’s citizens.

Aside from MKs from Finance Minister Yair Lapid’s Yesh Atid party, few other committee members were persuaded.

“We must differentiate between a deficit limit that can be justified economically and a spending limit that is ideological, a war against welfare mechanisms,” said Hadash MK Dov Hanin, who added that Israel already spent considerably less than its European counterparts on social services.

If the current formula isn’t broken, asked Shas MK Yithak Cohen, why fix it? 

“We managed to bring down the debt-to-GDP ratio, so why change it? Interest payments are going down, and the fruits of growth must be distributed to the public. The current formula is correct, but fiscally and socially,” he said.

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