Finance Minister Yair Lapid (R) sits across from Prime Minister Binyamin Netanyahu at the cabinet meeting in Jerusalem..
(photo credit: REUTERS)
Just hours before Rosh Hashana rolled in on Wednesday, Prime Minister Binyamin Netanyahu and Finance Minister Yair Lapid agreed on the outline for the 2015 budget.
As previously reported, the budget will increase the deficit to 3.4 percent of GDP from the planned 2.5%, add NIS 6 billion to the defense budget – bringing it to a total of NIS 57b. – and keep tax rates steady.
The agreement also included a new provision to add NIS 7b. to NIS 8b. to cover the costs of Operation Protective Edge.
Lapid had previously said that the costs of the summer war with Hamas would be covered by a 2% across-the-board cut in the 2014 budget. That cut “grandfathered” in a de facto decrease to 2015 spending by lowering the base from which automatic annual increases are calculated.
Similarly, by labeling a significant chunk of the defense spending a one-time cost that will not be automatically renewed in future years, the increase will have a less pronounced effect on future budgets.
Defense Minister Moshe Ya’alon has lobbied aggressively for a NIS 11b. increase to the defense budget.
The agreement also advanced Lapid’s signature zero-VAT policy, which had been a bone of contention in negotiations.
The policy, which Bank of Israel Gov. Karnit Flug and other economists have slammed as ineffective, will cost an estimated NIS 3b. a year.
Without further raising taxes or the deficit, it is still unclear where the billions in extra funds for defense will come from, and thus far officials have kept mum as to whether new spending cuts are part of the deal.
Flug has warned against cuts to civilian spending such as education, health and welfare, noting that Israel already spends relatively less than other OECD countries in those areas, and more cuts could adversely affect the economy. She also came out against raising the deficit beyond 3% of GDP.
Higher deficits increase, rather than reduce, Israel’s debt burden, and could eventually lead credit ratings agency to reduce Israel’s credit rating.
One such agency, Standard and Poor’s, recently reaffirmed Israel’s rating and labeled the outlook “stable.” In its report, it said it expected the deficit to rise to 3.6% of GDP in 2015, but the company expects that Israel will bring its deficit down significantly in the coming years.