(photo credit: Ariel Jerozolimski [file])
Finance Minister Avraham Hirchson called on parliamentarians to conduct a "public, in-depth and professional" dialogue on the NIS 295.4 billion 2007 state budget that he presented to the Knesset on Monday, and assured them that compromises would be "up for discussion" between its second and third readings.
"We will examine every initiative and every proposal. We will try to be considerate of the entirety of desires and to compromise where it is possible. But remember... every change and adjustment will only be within the framework of the budget," he said.
Hirchson said the Treasury's "basic budget principles" would be preserved during the Knesset deliberations. The 1.7 percent target for spending growth would be met, he said, and "all one-time costs from the war will be brought outside of the current budget, and there will be a one-time spending increase for them of 1.6%."
"Even in the present circumstances, in which it will not be possible to cut the defense budget and [we] were even required to add to it, the government of Israel will add a total of NIS 1.5b. for social needs in Israel," he said.
Real spending on social issues will rise compared to 2005: NIS 864 million more would be spent on health; NIS 593m. on education; NIS 1.34b. on welfare and National Insurance Institute allowances; NIS 290m. on the Bureau for Rehabilitation of the Disabled; and NIS 575m. on employment, bringing the total real increase to NIS 3.8b. The figures were adjusted to account for inflation and population growth, but do not include increased spending caused by the war against Hizbullah.
Hirchson said previously planned structural reforms would be implemented, but "we will not do this aggressively or unilaterally, we will do this in full cooperation and with sensitivity."
The Finance Ministry is currently negotiating with the Histadrut labor federation on public sector wages and the effects of economic policies and planned cuts. Budget Supervisor Kobi Haber said that if the negotiations ended "unfavorably," the fiscal impact would be significant, but that the Treasury would try to fit the costs of a wages agreement into the budget framework.
Beyond continued tax cuts, key reforms included in the 2007 budget include beginning the structural reform of Israel Electric; privatizing the Haifa oil refinery; merging half of Israel Military Industries with Rafael and privatizing the other half; privatizing the postal system; advancing structural changes within the Israel Airport Authority and working towards an open skies aviation agreement with the European Union; reforms in the water market; merging more local authorities; efficiency measures in the health system; continued reduction in the number of foreign workers; integrating mothers into the labor force; and increasing supervision of the defense budget.
Hirchson said he would decide soon whether to recommend adoption of a negative income tax (NIT) system to increase incentives for the jobless to join the work force.
The budget proposal includes NIS 2.7b. for rehabilitating the North, partly funded by a NIS 1.2b. cut to government ministries. Another NIS 1.5b. will be provided by the United Jewish Communities of North America.
The one-time addition to the budget due to the war includes NIS 3.5b. in 2007 - reflecting 1.6% growth beyond the growth limit - and NIS 2.2b. in 2008. Next year's sum comprises NIS 800m. to "strengthen the North" and NIS 2.7b. of added funding for military costs.
The direct costs of the war for the state budget have reached an estimated NIS 12b. so far, including the Treasury's agreement to provide the Defense Ministry with a NIS 8.2b. one-time addition spread over three budget years (2006-2008); NIS 500m. paid for direct damages; NIS 3b. for indirect damages (both according to preliminary forecasts); and NIS 300m. for other costs incurred during the fighting.
Next year's deficit will total NIS 18.7b., the equivalent of 2.9% of Israel's gross domestic product - forecast to total NIS 645b. next year - which Haber stressed was within the legal requirement of not more than 3% of GDP. The 2006 deficit is expected to equal 1.5% to 2% of GDP, compared to 1.9% in 2005; 3.7% in 2004; and 5.4% in 2003.
The Treasury said per capita GDP is expected to rise 2% in 2007. Next year, unemployment will drop to 8.4% of the work force and participation in the work force will grow to 56% of the adult population, the Finance Ministry predicted.
Government debt is expected to equal 89.2% of GDP by the end of 2006 and 87.1% of GDP in 2007. Fully 29.9% of the proposed 2007 budget is dedicated to paying back debt.
To meet the 1.7% yearly budgetary growth target, the Treasury made NIS 3.85b. in cuts. Of that amount, NIS 1.12 was found by postponing welfare payments; NIS 1b. by cutting Israel Railways' development budget; NIS 650m. through "specific reductions" in government programs; NIS 560m. through postponing coalition agreements; and NIS 520m. by cutting state purchasing funds.
Hirchson praised members of the governing coalition for approving the budget without major changes in September.
"The government ministers demonstrated responsibility... [They] understood that we added what we could both to social and defense [spending]," he said. "The government ministers voted [in favor] because this is the best and most balanced budget that could be presented in the present circumstances."
Hirchson reiterated his pledge to have the budget passed by the Knesset before the end of December. "The primary victim of every day that the state budget is not approved is the little citizen who depends on the state budget," he said.
Haber said the question of increasing the defense budget was a "very difficult issue."
"We have held a significant discussion with the Prime Minister [Ehud Olmert, who was reported to favor increases to the defense budget]... These talks have not yet ended, and I do not know how they will influence the 2007 budget," he said.
For the first time, the Defense Ministry published on Monday a summary of its nonconfidential spending planned for the 2007 budget year, as part of efforts to increase transparency in defense spending following the war in Lebanon.