Treasury presents 2-year budget to Knesset

Economic efficiency plan targets unemployment, drop in exports.

steinitz and friends 88 248 (photo credit: Ariel Jerozolimski)
steinitz and friends 88 248
(photo credit: Ariel Jerozolimski)
The draft budget for 2009 and 2010 will reduce unemployment and alleviate a worrying decline in exports, Finance Minister Yuval Steinitz said Tuesday. "The most important part of the draft budget is the economic efficiency plan, which aims to put a halt to the rapid rise in unemployment in the second half of the year and protect jobs, as well as crack down on the 300,000 illegal foreign workers in Israel," he said at a press conference in Jerusalem. "We are convinced that the economic plan will help the economy get out of the crisis in the first wave of a recovery." Yarom Ariav, the Finance Ministry's director-general and acting budget director, said the economy has not come out of the crisis. "Currently there is a situation of dissonance," he said at the press conference. "There is a feeling of overoptimism, as if a recovery is near, while on the other hand, economic indicators point to a continued rise in unemployment and a rising deficit." The Finance Ministry expects the economy to contract by 1 percent this year and a return to growth of 1.5% in 2010. The Bank of Israel forecasts a contraction of 1.5% in 2009. The proposed 2009-2010 budget was presented to the Knesset on Tuesday. Its first reading will be Wednesday, which will be followed by a vote expected late at night. The second and third readings will be in July; until then, Knesset members will be able to make changes to the proposed budget. The two-year budget is accompanied by an economic-efficiency bill, which includes the government's economic plan, as well as other sections related to the package deal that was reached between the government, the Histadrut and the Israel Manufacturers Association. The deal helps the government implement major reforms planned as part of the economic efficiency plan. "After a marathon debate on Monday night, we reached an agreement with the Histadrut Labor Federation and the Manufacturers Association of Israel and closed most of the gaps," Steinitz said. The state budget for 2009 includes NIS 316.5 billion in spending and could rise to NIS 330b. depending on state revenues. Spending in 2010 will be NIS 325.3b., with a possible increase to NIS 341.8b. The deficit ceiling has been set at 6% of gross domestic product this year and 5.5% in 2010 to make up for the plunge in tax revenues due to the global economic crisis. The shortfall in tax revenues will be NIS 43b. this year and NIS 44b. in 2010. The expenditure ceiling for the 2009-2010 budget will be raised to 3% from 1.7%. As a result, the public debt-to-GDP ratio, which has fallen from 98.2% in 2004 to 78.3% at the end of 2008, is expected to increase to 84% this year and 87% in 2010. In an effort to increase state revenues from taxes, the value-added tax on goods and services will be raised to 16.5% from 15.5% for one year to 18 months, and the exemption of VAT on fruit and vegetables will be lifted, despite fierce opposition. "The VAT exemption on fruit and vegetables is benefiting the rich, and we will insist on the levy," Steinitz said. "The alternatives, such as raising VAT on goods and services to 17.5% or cutting child-care benefits, are more regressive." More than NIS 10b. is allocated to finance immediate measures to cope with the impact of the global crisis on the local economy. NIS 1.1b. is allocated for assisting exports, NIS 130 million in guarantees for a loan fund for small and medium-sized businesses, NIS 2.5b. for infrastructure projects and development of the periphery, NIS 2b. for road building, and NIS 2.5b. for boosting the labor market and reducing unemployment. The Finance Ministry said the loan fund for medium-sized businesses, which was launched three months ago to assist companies during the downturn, had approved 100 loans worth NIS 210m. Loans worth NIS 66m. have been approved this month.