Finance Ministry admits it still doesn't have sources for increased defense spending

Lapid promises that the budget will tackle the high cost of living, says electricity prices will come down by double-digits in 2015.

Finance Minister Yair Lapid (photo credit: MARC ISRAEL SELLEM/THE JERUSALEM POST)
Finance Minister Yair Lapid
Emerging details on the 2015 budget released by the Finance Ministry on Sunday shed some light on Finance Minister Yair Lapid’s economic program, but raised a slew of questions on how it would fund spending on defense, education and health.
An agreement inked between Prime Minister Binyamin Netanyahu and Lapid just hours before the Rosh Hashana holiday on Wednesday, included a NIS 6 billion increase to the 2015 defense budget and a NIS 7b. increase in spending from this year’s budget.
The 2015 addition – NIS 4.3b of which was set aside as a one-time expenditure, not to be automatically included in future budgets – was covered by an increase in the deficit, which is planned at 3.4 percent of GDP.
But when asked where the funds to cover the NIS 7b. in 2014 would come from, budget director Amir Levy noted that cuts from other ministries, reduced interest spending and the use of reserve funds did not totally cover the costs. Finance Ministry officials will meet in November on the issue, he added.
Asked how future defense spending would be dealt with, Lapid deferred to the Locker Committee, which is preparing recommendations on how to bring the unruly and unsupervised defense budget under control.
Lapid and higher-ups within the finance ministry added some details to their already announced budgetary plans – no tax increases, a 3.4% deficit and moving forward with the controversial zero-VAT policy – at Sunday’s Jerusalem press conference.
“If the last budget was a budget of crisis, this budget is a budget of hope and promise,” Lapid said.
The NIS 328b. budget (a figure that does not include the NIS 4.3b one-time sum set aside for defense) would include a significant increase in spending on education (NIS 1.8b.) and health (NIS 2.8b., including a NIS 500 million for starting to implement the recommendations of Health Minister Yael German’s commission on quality and care).
Still, it was unclear against what base the figures Lapid cited were calculated. Given that he cut all ministry budgets (save defense) by 2% in August to help pay for Operation Protective Edge, the figures could have been in relation to the original 2014 budget, the cut budget, or the automatic increases that had previously been calculated for the 2015 budget.
A Jerusalem Post inquiry found that the education figures were aligned with the 2014 budget, as Lapid’s rhetoric implied, but the health figures were off by an order of magnitude, amounting to an increase of only NIS 300m., based on figures provided by the Finance Ministry, and not NIS 2.8b.
Indeed, the Bank of Israel had already forecast that the 2015 budget would be close to the proposed 3.5% deficit, even before the big defense splurges, begging the question of where the funds were coming from.
“It’s not clear at all that the deficit will be 3.4%,” said Prof. Momi Dahan, a budget expert at the Hebrew University of Jerusalem who supports slashing tax benefits and increasing social spending.
“It could be much higher, and that’s something that’s broken with the public discourse.
In the last 20 years, I don’t recall such a situation.”
Labor MK Shelly Yacimovich picked up on the same theme.
“Lapid is taking advantage of the public’s lack of proficiency with the rules of the budget and is publicizing figures that have no relation to reality,” she said. Of any budget increase, NIS 8b. was an automatic boost tied to increases in population, she noted, meaning that diverting NIS 6b. to defense would cut per capita spending.
A Labor spokesman pointed out that Lapid promised not to raise taxes, to increase the defense budget, to invest in welfare, education and health – but has yet to explain where he will get the money.
“If we had a shekel for every promise of Lapid’s, Israel could pay off its deficit and stop charging taxes,” a Labor spokesman said. “Lapid has promised everything to Israeli citizens other than that they’ll fly to the moon.
“Zero is not the amount of VAT that will be on housing, it is the amount of achievements Lapid has had in his first two years as Finance Minister,” he added.
According to MK Stav Shaffir (Labor), Lapid is only revealing the parts of the budget that are convenient for him while hiding those that make him look bad.
“We’ll find the first lie a month after the budget is approved when we see the money starting to flow to dark, hidden places through the secret money tunnels of the Finance Committee,” she said. “Someone has to pay for Lapid’s populist legislation and the Defense Ministry’s extortion, and I have no doubt that that someone is the Israeli public.”
Looking to sources of revenue, Lapid specifically cited the need for a status change of the Jewish National Fund, which Levy said could bring in NIS 1b. a year. Lapid also pointed to the Sheshinski 2 Commission, which is expected to finalize royalty rates for natural resources other than oil and gas, and the oft-repeated sources of “broadening the tax base” and fighting tax evasion.
Lapid promised that the budget would tackle the high cost of living.
Electricity prices, he pledged, would come down by double-digits in 2015 as a result of taxes remaining stable.
Regarding housing, he heaped blame on critics of his zero-VAT law who have stopped its progression through the Knesset and predicted it would pass through committee in the coming weeks. The law, which has been harshly criticized by economists, the opposition and the Bank of Israel as an ineffective sticking plaster for dealing with the housing problem, has been a central part of Lapid’s platform.
The policy, he reminded his critics, was just one piece of a larger set of policies aimed at reducing the high cost of housing, which has roughly doubled in the past seven years.
In education, Lapid said 3rd- and 4th-graders would have extended school years, ensuring that their parents could continue working for longer without having to pay for other arrangements.
Knesset Finance Committee chairman Nissan Slomiansky (Bayit Yehudi) said he is satisfied Lapid and Netanyahu ended their arguments about the budget, but wondered where the finance minister will find the funds for the plan he presented. He plans to invite Lapid to explain the 2015 budget further to the Finance Committee.
“The budget is not perfect,” the MK added. “It is missing catalysts for growth and presents a 3.4% budget, which makes me uncomfortable.”
Lapid deflected questions Sunday as to what the deficit would look like further down the line. That may be a problem for international investors and ratings agencies who expect a credible plan to reduce Israel’s debt.
He admitted Sunday that, even before Operation Protective Edge, he had planned for the 2015 deficit to be 3%, not the 2.5% the Bank of Israel recommended for reducing debt.
Meanwhile, Meretz leader Zehava Gal-On sent a letter to Lapid and Netanyahu demanding that they publicize all the details of the budget agreement.
Gal-On posited that Lapid and Netanyahu are not telling the truth when they say they can maintain a 3.4% deficit without raising taxes or further cutting ministries’ budgets.
“It’s impossible, the numbers don’t work,” she remarked. “The prime minister and finance minister need to give more detailed answers.”