Who will pay for Netanyahu’s expensive coalition deal?

Before incoming finance minister Kahlon tangles with the structural problems in the economy, he will have to figure out how to pay for the demands keeping the coalition together.

Celebrations at the Likud headquarters in Tel Aviv, March 17, 2015 (photo credit: MARC ISRAEL SELLEM/THE JERUSALEM POST)
Celebrations at the Likud headquarters in Tel Aviv, March 17, 2015
When the governing coalition fell in December, wary citizens complained that an election was unnecessary and expensive, costing the state roughly NIS 1.5 billion.
But the election was just the beginning.
The coalition deals Prime Minister Benjamin Netanyahu signed in the past few weeks turn out to be an order of magnitude more expensive.
Knowing that Netanyahu had few viable coalition options, the parties entering the government exacted heavy prices in the name of their constituencies or the ministries they stood to control.
By some estimates, the coalition deals will add up to NIS 9 billion, which alongside the NIS 5.6 billion in extra defense spending and the NIS 8 nillion that already needed to be cut will put the 2016 deficit at roughly double its intended target.
That level of politically motivated spending makes Yair Lapid’s ill-conceived 0 VAT proposal for new housing – a policy that helped break the last coalition in part because it was a monumental waste of NIS 3 billion – look like pocket change.
So where did all that money go? Let’s begin with the ultra-Orthodox parties.
When Yair Lapid became finance minister in 2013, he demanded a reduction in National Insurance Institute child allotments, which increased with every respective child, thus benefiting the ultra-Orthodox. The spending cut, which was intended to push the community into the workforce, saved NIS 2.75 billion. United Torah Judaism demanded that the allotments be returned, and the cost may be somewhat higher given growth in the haredi population. Another billion will go toward haredi education, according to media reports.
Shas demanded that Netanyahu make good on his preelection promise to eliminate VAT on basic food items, a policy he had opposed up until the campaign, and opposed again once the results were in.
Netanyahu finally acquiesced, and though some reports put the cost of the policy as high NIS 5.5b., more recent estimates put it closer to NIS 2 billion.
The Bank of Israel isn’t thrilled about the policy, noting that it benefits the rich – who actually consume more basic food products – more than the poor. It would be more effective to offer the poor a targeted benefit, such as tax credits for working, which would cover the cost of the VAT on food items. The bank also complains that a differentiate VAT system opens room for loopholes, exploitation and a ton of expensive bureaucracy.
Bayit Yehudi’s Naftali Bennett allegedly demanded a NIS 1 billion increase for education, a welcome expenditure given that Israel spends less on education than its OECD counterparts. On a similarly welcome note, another billion will go toward implementing Kulanu MK Eli Alalouf’s poverty plan, according to TheMarker, which also said Kulanu insisted on a NIS 1.3 billion expenditure on raising soldier salaries.
Lucky for Netanyahu, he’s not the one who has to do the hard math after doling out promises. It is Kulanu’s Moshe Kahlon, the incoming finance minister, who will have to figure out how to trim the billions of shekels now weighing down his budget.
Lucky for him, the 2015 budget is operating on autopilot based on 2014 spending levels, and is expected to roughly hit its 2.5 percent deficit target. Kahlon may leave that plan in place and put his energies toward 2016. But the 2016 deficit is scheduled to drop to 2% of GDP, and the Bank of Israel had already forecast before the coalition deals were signed that it was NIS 8 billion over the spending limit, and another NIS 2 billion of revenues would need to be found to hit the deficit target.
Kahlon has several options.
The obvious one is to break the rules, and increase the deficit target, which will not make Israel’s creditors or credit ratings agencies happy.
Another is to blow up the rule that limits increases in annual spending, which will at least mean he won’t have to cut from important social ministries to accommodate the coalition demands. Even so, he’ll have to raise more revenue somehow, which means higher taxes. Another option is to backtrack on defense spending increases, but that is something which neither Netanyahu nor his own No. 2 in Kulanu, Yoav Galant, wants. And of course, he can always pull back the social spending that tempers Israel’s alarming inequality.
Kahlon has already discussed his desire to raise taxes on investors scooping up expensive homes, but that will only make a dent in the coalition spending binge.
Kahlon campaigned on a platform of economic reform that would include the housing market and the banking system and increase competition for the benefit of consumers.
But before he tangles with the structural problems in the economy, he will have to figure out how to pay for the demands keeping the coalition together in the first place.