(photo credit: Ariel Jerozolimski)
For Prime Minister-designate Binyamin Netanyahu, the formation of a stable national unity government came with a hefty price tag, one that outgoing Finance Minister Ronnie Bar-On is warning cannot be paid in light of a growing budget deficit and a deepening economic crisis.
"The formation of a broad and stable government has an economic cost," Netanyahu said on Thursday. "But the economic cost of not forming a broad and stable government is so great in economic terms that the costs associated with establishing a coalition are negligible."
Meeting the demands of the coalition partners will cost taxpayers an estimated NIS 6.5 billion over the next few years. The deal struck with Shas and Israel Beiteinu will cost an estimated NIS 2.5b. this year and commitments made to the Labor Party translate into an additional NIS 2.8b.
"I don't buy the argument that a new, stable government could not have been formed in any other form and that the commitments promised by Netanyahu are inevitable," Prof. Avi Ben-Bassat, a professor of economics at the Hebrew University and a former director-general of the Finance Ministry, said in an interview with The Jerusalem Post on Thursday.
"Although we have not yet seen the full extent and depth of the coalition commitments, there is much reason for concern in terms of the costs, in particular as the economy is struggling with a crisis, a large deficit and rapidly declining tax revenues. They are not the steps in the right direction to cope with the crisis," Ben-Bassat said.
Speaking to Army Radio on Thursday, Bar-On said the Finance Ministry would not be able to meet the commitments made by Netanyahu.
"The coalition commitments are unwelcome and will constrain the Treasury from taking the necessary steps to cope with the employment problem and the economic crisis. As a result it will be more difficult and take longer to emerge out of this crisis," Ben-Bassat said.
Tax revenues have been falling far under previous estimates in recent months and are expected to fall short of those on which the draft 2009 state budget was based, resulting in the deficit exceeding its target of 1 percent of GDP by billions of shekels.
This year's tax receipts are expected to fall as much as NIS 25b. to NIS 30b. shy of the earlier estimates.
"This is not the time to spend money on increasing child allotments or budgets to yeshivot and other religious colleges. There are more important issues. Even without an increase in spending, the deficit is expected to increase to 5.5% this year because of falling tax revenues amid the economic crisis," Ben-Bassat said.
Over recent months Treasury officials have become concerned, not only over this year's expected large deficit, but over larger deficits in the following years, which could be detrimental for the economy in the long-term.
"I don't believe that Netanyahu will be able to get approval by the Knesset - in view of fierce opposition by the Treasury - for all the coalition commitments he has made," said Shlomo Maoz, chief economist at Excellence Nessuah Investment House in Tel Aviv on Thursday.
"In light of the deepening crisis, commitments that are not fruitful for the economy such as larger budgets for religious colleges might be postponed. In a crisis the working class cannot subsidize the non-working population," he said.
The state budget is already headed to a deficit of NIS 45b. to NIS 50b. this year, according to Maoz, as a result of falling tax receipts and the costs resulting from Operation Cast Lead and other past and future demands from the defense establishment.
"Instead of raising the government's spending ceiling the new government should change the structure of the budget and cut future defense spending plans. Within the multi-year recommendations of the Brodet Committee on Defense Spending, it is determined that spending could be eased during an economic crisis," Ben-Bassat said. "To cope with the crisis, spending should be raised to implement temporary steps to assist those who want and need to find work, rather than supporting the ones who are not joining the work force."
Ben-Bassat, a former economist at the Bank of Israel, suggested that the government invest in improved training opportunities to encourage employment, increased research and development, and reducing the number of foreign workers, and implement a negative income tax.
The financial provisions of the agreement with the Labor Party, formulated with the help of Histadrut Labor Federation chairman Ofer Eini, commit the new government to allocate budgets for infrastructure projects, the establishment of academic institutions and research and development centers, and for creating new jobs in hi-tech.
This includes an annual NIS 100m. more for retraining, and NIS 200m. to subsidize day care centers to encourage women to enter the work force. An as-yet undetermined sum will be designated to assist nonprofit organizations and prevent mass dismissals. Also included is an additional NIS 750m. for pensions in 2009-2011.
The agreement extends the eligibility period for unemployment benefits by a month, and removes from the agenda initiatives to tax homemakers. Furthermore, the Likud-Labor coalition agreement gives the Histadrut a veto over changes in salaries for government employees. The document also calls on all employers and the government to contribute to a fund for businesses in financial straits.