Lapid to cut ministry budgets 2%, raise deficit

Finance minister to present a budget proposal to the cabinet Sunday.

Finance Minister Yair Lapid. (photo credit: REUTERS)
Finance Minister Yair Lapid.
(photo credit: REUTERS)
Finance Minister Yair Lapid is set to present a proposal to the cabinet Sunday that will cut ministry budgets across the board by 2 percent and raise the deficit to 3.1% of GDP within the 2014 budget framework.
The defense budget will be excluded from the cuts, which amount to roughly NIS 1.5 billion, and will go toward covering the costs of Operation Protective Edge.
Lapid met with Prime Minister Binyamin Netanyahu and Bank of Israel Gov. Karnit Flug, the top economic adviser to the government, on Tuesday to hash out details on how to cover costs for the operation within the current fiscal year, and plan the 2015 state budget, which is scheduled to be presented to the cabinet on September 11.
The Yesh Atid leader has promised not to raise taxes, while Flug has argued that both cuts and more revenues were necessary to cover increasing costs.
The deficit target for 2015 was meant to drop by half a percentage point to 2.5%, but Lapid already announced his intention to raise it to 3% earlier in the month. Based on current projections, it could reach 3.5% of GDP. Higher deficits mean Israel must borrow to fund its spending, and pay back more in the long-term.
The Bank of Israel argues that one-time deficit increases are acceptable for extraordinary circumstances, such as Operation Protective Edge, but that structural deficits from disparities between recurring costs and revenues can erode Israel’s debt position, leading to higher borrowing costs.
High risk premiums resulting from the security situation force Israel to pay about double the OECD average in interest on its debt. Through July 2014, the amount Israel spent on interest stacked up to about half what it spent on defense.
While moving forward with the cut, Lapid insisted on pushing forward his 0 VAT housing policy, which has been derided by economists as ineffective. With an annual price tag of NIS 3b., it costs double the amount of the budget cuts.
Plans for changing the budget may yet run into obstacles from within the government.
Knesset Finance Committee chairman Nissan Slomiansky, whose Bayit Yehudi party is in the coalition, has promised not to allow cuts to ministries such as health, education and welfare.
Labor MK Shelly Yacimovich tore into Lapid and Netanyahu for the budget cuts, calling them “cowardly.”
“Of all the ways available to fund Operation Protective Edge, including, among others, canceling the incomprehensible 0 VAT plan and canceling tax exemptions and extensive benefits for the rich, Netanyahu and Lapid chose to increase the gaps between the rich and the poor and hurt the real strength of the State of Israel – the socioeconomic strength,” she said.
Meretz chairwoman Zehava Gal-On went on to criticize the special treatment given to the defense ministry in budgetary dealings.
“While Operation Protective Edge incurred significant costs on the defense establishment, the way to cover them is not to cut the education, health and welfare budgets, but to use the defense establishment’s own funds,” she said.
“The defense establishment has reserves of over NIS 6b. that were not used in 2013, and before the defense people come to ask for more money, they must do a serious inspection to check where they can cut at home in order to finance Protective Edge,” she added.
Beyond the direct costs of Operation Protective Edge and replenishing weapons, the Defense Ministry has sought a NIS 11b. budget increase for 2015.
Tuesday’s budget meeting – the first this year to include the prime minister – came later than usual. Such meetings often happen before summer, and the budget proposal is usually presented in July. Lapid was already behind schedule when fighting with Gaza broke out in early July, which complicated the budget debate by eating up extra funds for damage compensation and military spending and slowing the economy, meaning less incoming tax revenue.
By law, if the budget is not approved by the Knesset by the end of the year, automatic elections will be triggered, though the Knesset can extend the deadline until March. Failure to pass the 2013-2014 budget at the end of 2012 led to the last round of elections, which took place in January 2013.