Lapid ready to slash budget

Finance minister stresses need to aid "the working man"; Histadrut, union leaders join forces ahead of talks.

Lapid at faction meeting 370 (photo credit: Marc Israel Sellem/The Jerusalem Post)
Lapid at faction meeting 370
(photo credit: Marc Israel Sellem/The Jerusalem Post)
Finance Minister Yair Lapid said Tuesday night that he was prepared to go to “war” over his budget, which he said would include cuts to defense spending and hinted would include changes in wage agreements.
Speaking at the Institute for National Security Studies conference at Tel Aviv University, Lapid said, “You know that there will be war over several of the things I’ve outlined here, perhaps over all of them. I say, ‘Let there be war.’”
Lapid said the deficit constraints meant the Treasury would have to look into “every old agreement that they tell us they can’t touch ‘because that’s the way it always was.’”
Fresh off a two-day airline strike, the Histadrut labor federation said on Monday that it was forming a united front with union leaders in the fields of medicine and teaching and with university students in preparation for budget talks.
The central guiding factor for the budget, Lapid said, was to aid “the working man,” the Israeli citizens who work and pay taxes. The issues Lapid highlighted as “betraying” Israel’s workers included low state royalties on natural resource extraction; healthy people living on disability payments; narrow interests controlling the country’s ports; public services and product prices; high daycare costs; housing benefits that put those who serve in the army at a disadvantage; and water prices that are 4 percent too high because of inefficiencies in the market.
The finance minister also said the defense budget would have to be cut, and the ultra-Orthodox population would have to be educated and integrated into the workforce, which would add a full percentage point to the nation’s GDP.
In an earlier meeting with Union of Local Authorities chairman Shlomo Buhbut, Lapid said that everyone would need to participate in the cuts, but promised to try and “minimize the damage” of deficit reduction measures to the local authorities.
Outgoing Bank of Israel Gov. Stanley Fischer, who spoke earlier at the conference, said the budgetary problems were dire.
“The Israeli economy is very good, but not great, as it was in previous years,” he said. “The reason is the budget. Many people ask what the problem with a 4% deficit is. After all, it’s only 1% more than 3%.
“The answer is very simple,” he continued. “The reason is that unlike the United States or Europe, Israel’s economy is at full employment, which means it can’t expect an extra boost in growth to bring down the deficit.”
Fischer praised Lapid for sticking with the 3% deficit limit, saying it was a brave decision that would ward off future risks of the deficit rising.
“If the economy were to enter a recession in the coming years, an event which is not expected but is not impossible, the deficit would grow another 4% to the highest level we’ve seen in the 21st century,” he stated.
Fischer also said that Israel’s export-oriented economy faces challenges both from slowing world economic growth that inhibits trade, and the bank’s own low interest rates, which put upward pressure on the shekel and makes Israeli products more expensive on the world market.
In his speech Tuesday night, Lapid referred to the deficit as a “budget hole of NIS 35 billion,” repeating a figure he used at the Knesset on Monday that drew him into an online spat with opposition leader Shelly Yacimovich.
Posting on Facebook a recent Treasury document on the deficit Tuesday morning, Yacimovich noted that the most recent figures actually pegged the cumulative deficit for the past year (March 2012 – March 2013) at NIS 42b., around 4.5% of GDP.
“Is this Lapid’s enormous mistake or painful ignorance?” she wrote. “A difference of NIS 7 billion is so dramatic to all of our lives that there are almost no words to describe the depth of embarrassment.”
NIS 7 billion, the Labor Party leader noted, was the entire higher education budget, greater than the budget for hospitals and triple the budget of the Economy and Trade Ministry.
“The state budget is too important for errors of this magnitude,” she scolded.
Lapid’s spokesman Nilly Richman shot back at Yacimovich, posting a rebuttal in the comments section.
“The annual deficit for financing in 2012, which is the deficit that includes net credit receipts, came to NIS 34.6b., and that’s the deficit the finance minister was talking about,” she wrote.
“This is the number accepted by the Bank of Israel, the Finance Ministry and the Israeli government.”
Because Israel takes in money from loans it has given out, the actual amount of money it has to spend in order to finance the deficit is lower than the deficit itself. Thus, in 2012, Israel only had to finance NIS 34.6b. of the NIS 39b. it overspent in the budget.
The definition generally falls in line with Lapid’s use of the term “overdraft,” and in Tuesday night’s speech he explained that budget cuts were necessary because “the larger the overdraft, the larger the interest on it, and instead of spending billions on education and health, we spend those same billions on Israel’s growing interest.”
Chiding Yacimovich on Facebook, Richman said, “I have no doubt you made the mistake in good faith, and we’ll be happy to pass the real data on to you,” adding, “It’s very important that the economic picture will be presented fully for the opposition leader, in order to facilitate an appropriate public discussion.”
Yacimovich dismissed the explanation.
“Sometimes it’s easier to admit to a mistake. After hours of searching through Treasury data since my post this morning, Lapid found the number that fits the mistake he made,” she said.
“Lapid’s decision to use a deficit figure that includes net credit received is puzzling, to say the least.”
Indeed, as Richman admitted, the figure Lapid used referred to last year’s deficit, not projections for the 2013 and 2014 budgets.
In general, when economic policy makers refer to the deficit and the deficit target, they are referring to the basic difference between spending and revenue in the budget, without reference to the net credit or the amount of financing necessary for the deficit.