Kahlon’s budget draft envisions first debt increase since 2009

The proposed budget, like the previous one, overshoots the legal spending limits by a factor of almost double, and required fiscal acrobatics to hit the new 2.9% deficit targets.

Finance Minister Moshe Kahlon (photo credit: MARC ISRAEL SELLEM)
Finance Minister Moshe Kahlon
(photo credit: MARC ISRAEL SELLEM)
The draft budget Finance Minister Moshe Kahlon presented to the government on Sunday is full of reforms, but also plans the first increase in Israel’s debt burden since 2009, while cutting spending in government ministries by three percent beginning next year.
“A budget is not numbers. It is first and foremost values. It expresses a worldview,” Kahlon said upon presenting the draft budget to the government on Sunday. “The greatest threat that we face as society is the widening of gaps, and fiscal policy is a tool that can aid in the campaign to reduce the ever-widening gaps.”
The plan includes many of the reforms that have been announced since the government was formed, including lowering the cost of food and housing and increasing competition in the financial sector. It will pass the “cornflakes law” increasing dry food competition; implement the natural resource taxation of the Sheshinsky 2 commission; and includes agricultural reforms recently announced by Agriculture Minister Uri Ariel.
Like his predecessor, Yair Lapid, Kahlon brushed aside planned deficit targets, previously pegged at 2.5 percent of GDP for 2015 and 2% for 2016, instead setting both at 2.9%, with plans to gradually lower it to 1.5% by 2021, instead of 2019 as previously intended. Israel has deviated from its planned fiscal plans so frequently that the International Monetary Fund has said they are functionally non-existent.
The proposed budget, like the previous one, overshoots the legal spending limits by a factor of almost double, and required fiscal acrobatics to hit the new 2.9% deficit targets.
The bottom line spending was set at NIS 381 billion for 2015 and NIS 415b.
for 2016, including debt repayments In the 2015 section of the budget proposals, the Finance Ministry scales back NIS 4b. of coalition promises to hit its targets. In the 2016 plans, it cuts ministry spending by 3%, reduces the NIS 8b. in spending promised in coalition agreements, and squeezes more funds from the JNF for land it manages for the state.
Bank of Israel Governor Karnit Flug spoke out against the deviations from Israel’s fiscal path that the budget draft proposes, warning that the deficit – even if higher than originally planned – should not exceed 2.5% of GDP.
Flug told the cabinet on Sunday that in comparison to other countries in the OECD, Israel spends much more on defense and less on social issues. The size of the government has shrunk dramatically in the past decade, to the point that it is in the bottom third of the OECD, spending 39.5% of GDP compared to 45.1% overall in the OECD.
Despite these facts, she argued, the tax burden is relatively low in Israel.
If it were the same as other OECD countries, Israel would have another NIS 35 billion in revenue – more than the entirety of the 2015 deficit.
“Is it reasonable for a country with high defense expenditures such as we have to collect less taxes than most of the advanced economies? Is it unreasonable for the extra defense expenditures to be financed by an increase in revenue?” she asked the cabinet during her presentation.
Flug pointed to tax exemptions “that have no economic or social justification” as a source of revenue that could ease the fiscal pressure, and said there was also “room for an increase in the tax rates in order not to increase the burden of debt that we and our children will pay in the future.”
She also took a jab at the Finance Ministry for attempting to take some of the spending “off the books,” arguing that Israel’s fiscal credibility was at stake.
The Finance Ministry took a rosier view of its minister’s proposals, noting that before the 2008 financial crisis hit, Israel’s debt was just slightly higher than the OECD average of 73.3% of GDP. Since then, the debt in other OECD countries has soared to 110.9% of GDP in 2013, while Israel’s has fallen to 67.6% While Flug dwelled on the fact that Israel’s relative debt payments are some 80% higher than most OECD countries, the Finance Ministry indicated that Israel has cut the rate by more than half since 2002. Had it not, Israel would have to spend another NIS 40b. in interest payments this year.
If Israel is not careful about keeping its deficits in line, Flug warned, its debt will creep back up; its creditworthiness will suffer; and its interest payments will increase.