Finance Minister Moshe Kahlon (L) and Prime Minister Benjamin Netanyahu, September 3, 2015 .
(photo credit: MARC ISRAEL SELLEM/THE JERUSALEM POST)
Finance Minister Moshe Kahlon cast aside rules on spending and deficit limits with his proposal for the 2017-18 budget, a plan that would raise Israel’s spending levels by billions of shekels.
The budget, which also entails a slew of reforms, would get rid of inflation-linked limits on spending increases through 2023 in favor of nominal increases. That would pave the way for the government to increase the budget by NIS 12 billion in 2017 and NIS 16b. in 2018. The budget called for expenditures of NIS 454b. in 2017 and NIS 463b. in 2018 (in 2016 prices, including debt payments).
But Kahlon does not intend to pay for all the increases in spending.
The budget plan would increase deficit targets to 2.9% in both 2016 and 2017, after which the target would drop to 2.5%, with Israel’s overall debt burden.
“The repeated increases of the expenditure ceiling in recent years indicate the government’s difficulty in achieving its policy targets in the areas of security, welfare social services, and support for economic growth within the framework of the budget set by the fiscal rule,” a Bank of Israel analysis of the budget said.
Because Kahlon plans to cut both corporate and income taxes, sticking to the new targets also presents a challenge.
As a result, he plans on cutting ministry budgets across the board by 2%, and trying to increase revenues from the Jewish National Fund, Israel Airports Authority and the National Lottery.
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The Finance Ministry argued that Israel did not need to worry about the debt burden, which has already fallen to a relatively healthy 64.9% of GDP, because so many other countries have seen their debts skyrocket in the aftermath of the 2008 global financial crisis.
The BOI also said the current budgetary path would lead to a 3.5% deficit in 2019, meaning major adjustments would be needed to hit the 2.5% target planned for that year.
Furthermore, the central bank said the fact that recent years have been characterized by high tax revenue growth didn’t mean the trend would last, potentially setting up more problems.
Still, the BOI seemed more concerned with the way the new budget is to be distributed.
Given Israel’s lag in skills and quality infrastructure, it said: “It appears that reducing taxes is not the most effective step to support activity in the current state of the economy.
“Moreover, an examination of expenditure components and proposed steps indicates that the coming budget apparently does not include a marked increase for education and infrastructure – two critical barriers to long-term growth of the economy,” it added. The Bank has long argued that Israel’s expenditures on education, health and welfare were below those of most developed countries.
Indeed, the 2% across-theboard cuts would pull NIS 176 million out of the education ministry budget; NIS 47m. out of higher education; and NIS 311m. from public transport.
All that, the Finance Ministry argued, was necessary to pay for already-planned expenditures, including many promised in coalition agreements.
On the bright side, the BOI had good words for the reforms, which it said would likely benefit the economy.
The list of reforms includes steps to boost competition in communications and trade, level the playing field in education and change the approach to how self-employed people pay into the social safety net.
Yesh Atid MK Mickey Levy, a former deputy finance minister, slammed the plan as a giveaway to coalition parties.
“Since the election, Kahlon has distributed billions of shekels to the parties in a sectoral way, and today the citizens of Israel are paying the price and are required to fill the hole. Severance pay, rents rising and a freeze in the public wage sector are just the beginning,” he said.
Histadrut chairman Avi Nissenkorn reached a deal with Kahlon on Monday to delay a wage increase among public sector workers, in exchange for adding another raise further down the line. He said the agreement is acceptable as part of the effort to help Israel maintain its budgetary framework. •
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