The cabinet on Thursday was set to approve the 2017-2018 budget plan, which included a series of reforms, tax cuts, and a surge in spending.
The minister discussed the budget and were expected to approve it after press time. Once that happens, the budget must go through committee hearings and three full readings in the Knesset before it goes into law.
Prime Minister Benjamin Netanyahu lauded the budget, saying before the cabinet debated its particulars that it will “encourage investment, increase competition, and lower the cost of living.”
But Bank of Israel Governor Karnit Flug had harsh words for the plan, saying it cut back on important spending in areas such as education, even while pushing aside previous fiscal limits.
The budget plan wiped aside the previous respective deficit targets of 2.5 percent and 2%, setting the target at 2.9% for both years. It reduced personal and corporate tax rates, but also cut spending across-the- board.
Further, the budget and attending economic arrangements bill included a series of reforms that Finance Minister Moshe Kahlon has been formulating to tackle some of the central problems of Israel’s economy, such as plans to add competition to the credit and banking markets and reduce bureaucracy on imports.
Kahlon noted that the 2016 budget was coming in well below its own deficit target of 2.9%, and that the new budget would help drive the economy.
“We have a strong and growing economy,” he said. “The upcoming budget has significant engines of growth of billions in social budgets.”
Netanyahu said economic growth is critical for Israel to have a strong social policy.
“There is no social policy without an economic policy that encourages growth and creates resources,” he said. “Everything else is talk about allocation and reaping the fruit from the tree. We must constantly see to it that the fruit increases, to cultivate the tree; therefore, thanks to the growth of our economic tree, tax revenues are coming in which allow the state to finance all its needs – the social services in education, social welfare, health, security and all other fields.”
Lower taxes, he said will both spur investments in new places of employment, and will also lead more people into the workforce.
“They do not do so if taxes are high; they do this when taxes are low and the result is increased tax receipts,” he said.
The second engine to economic growth, he argues, is reduced government regulation. “Regulation is strangling the economy,” Netanyahu said. “We are opening the economy.”
Thirdly, Netanyahu said, the government is encouraging international technology firms to invest in Israel; and the fourth element spurring economic growth is “major investment in public transportation infrastructures. You all travel on the country’s highways, and you see the great change. We will continue it.”
At a briefing with diplomatic reporters two weeks ago, Netanyahu said that Israel’s security rests on a strong military and top-tier intelligence.
“The problem is this costs a lot of money,” he said, adding that Israel cannot afford this solely with the military assistance it receives from the US.
But Flug took a very different approach, insinuating that the spending measures were reckless, that they rely on rosy predictions, and would likely lead to a deepening of the country’s debt burden. If approved, the budget would mark at least the seventh straight year in which the deficit target was raised or missed altogether.
Cutting back spending in critical areas might not be worth tax cuts, especially when the economy is performing moderately well.
“Such an increase of the deficit during a period in which the economy is close to full employment may make it more difficult for fiscal policy in the future to support economic activity precisely during periods when conditions may be less favorable,” Flug said.
While the budget accounted for its spending over the next two years, she continued, it did so through many one-time measures and delays to expenditures, kicking the fiscal problem down the line until 2019.
Flug also indicated displeasure at the fact that the increased spending was not being directed toward the areas of the economy that most needed it for long-term growth.
“The current budget proposal includes a restriction on education expenditures in both years, such that those expenditures will increase at a lower rate than required to maintain the level of real service in the system,” she said.
Investments in preschool education and to affirmative action were of particular importance.
Flug also noted that work incentive programs, though effective in getting more people into the labor force, had only limited success in reducing inequality and poverty among marginalized groups.
Similar critiques, she said, applied to healthcare and infrastructure.
Yesh Atid MK Micky Levy, a former deputy finance minister, slammed the budget as aimless and damaging.
“On the one hand he’s reducing income tax in order to increase private consumption, and on the other hand he puts his hand deep in the pocket of the citizens with a row of tax increases – and implements a wide cut of 2% in all the ministries, something that will hurt public services to citizens,” he said.
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