Cabinet approves budget despite misgivings from Bank of Israel

After a marathon meeting, ministers overwhelmingly vote to approve budget; Peretz was only minister to oppose.

Finance Minister Yair Lapid and Prime Minister Benjamin Netanyahu. (photo credit: RONEN ZVULUN / REUTERS)
Finance Minister Yair Lapid and Prime Minister Benjamin Netanyahu.
(photo credit: RONEN ZVULUN / REUTERS)
After a marathon session, the government approved the 2015 budget late Tuesday, with just one minister voting in opposition.
The approval came after a 10-hour meeting during which a number of ministers expressed their doubts regarding the compromise reached between Prime Minister Benjamin Netanyahu and Finance Minister Yair Lapid. Ultimately, though, 21 ministers voted in favor, while Environmental Protection Minister Amir Peretz was the lone nay vote.
Lapid submitted his budget proposal for cabinet approval on Tuesday, as the Bank of Israel issued an unusual and sharp critique of the plan.
While the proposal set the deficit target at 3.4 percent of GDP – above the 2.5% target prescribed by the Bank of Israel to lower the national debt – BoI calculated that the deficit would add up to 3.6%. The Finance Ministry, it said, overestimated tax revenues in its calculations.
“The Bank of Israel believes that the realization of some of the measures suggested to meet the proposed deficit is quite uncertain,” the bank said.
The bank estimated revenues to be NIS 2.5 billion lower than the Finance Ministry, and put a higher price tag on Lapid’s zero-VAT housing policy.
Plans to issue bonds for Israel Railways, privatize parts of state-owned firms and defer spending would not yield the desired deficit reduction.
The expected deficit for 2016 would already be at 3.4%, well over the 2.75% target the Finance Ministry committed to as a means of returning to a path of debt reduction. Taxes would inevitably have to rise.
“In view of the frequent changes to the deficit path to which the government committed – including the increase in the ceiling in the proposed budget, an overestimation of expected revenues, the character of the proposed measures, the risk in not realizing some of the measures and the risks reflected in the domestic and global economic uncertainty that may lead to a further deviation from the deficit target – there is concern that exceeding the target may negatively impact the credibility of the government’s commitment to its fiscal targets,” the bank said.
At the start of the budget meeting, Lapid defended the plan as “a responsible budget, which addresses the immediate needs of the Israeli economy, but does not forget to build in long-term economic policy and a growth orientation.”
The budget plan increased the defense budget by NIS 6b., NIS 4.3b of which was considered a one-time expenditure, not to be counted in future budgeting nor against the legal ceiling in annual expenditure growth.
Netanyahu said the defense spending was necessary to deal with the increasing number of threats Israel faces.
“These threats require us to invest considerable sums in security and in the communities close to the confrontation line,” he said, adding that he had requested additional tax benefits for border communities.
Lapid promised the economic plan would fight tax evasion, close loopholes, encourage haredi (ultra-Orthodox) entry to the labor force, invest in small businesses and boost investments through updates to the Angel Investor Law.
But enough ministers said they would vote against the plan that the cabinet meeting had to be delayed by two hours, as Lapid and his ministry tried to reach understandings with them.
Peretz said ahead of the meeting that he would vote against the budget, which he called “political and not social.”
“This is not a budget that was born though in-depth analysis; rather, it came from political deals,” he said. “These are new politicians that adopted all the old methods of theft, methods that are meant to strengthen the strong and weaken the weak.”
According to Peretz, the budget does not try to lower the cost of living or help the poor.
Construction and Housing Minister Uri Ariel lamented that the budget presented to ministers was missing essential details, like what the government’s income is expected to be in 2015.
“This isn’t serious enough,” he told Army Radio, adding that he plans to vote against the budget and that negotiations between him and the Finance Ministry “hit a wall.”
Ariel pointed out that the ministries with budgets that are being increased – health, welfare and education – are all run by Yesh Atid members.
“I would have expected that things wouldn’t be [political] like that, but it appears that they are,” he commented. “I want more money to go to welfare and health, but people want more apartments, because prices are going up.”
Earlier this week, Tourism Minister Uzi Landau protested new taxes on medical tourism, saying that it was “slaughtering the goose that lays the golden eggs.”
According to Landau, adding a 15% tax plus the 18% VAT would make Israel a far less attractive option for medical tourism, which attracts 60,000 tourists a year, he said.
“If you raise the price by 35%, the tourists will stop coming,” he said.
Meanwhile, Meretz MK Ilan Gilon and activists from his party protested outside the cabinet meeting.
“This is a budget of tricksters and real-estate pimps,” Gilon declared. “A budget needs to reflect the responsibility of the government to giving a home, education and health just like defense, as opposed to an unfair distribution to a small amount of people who get the most, and most people who get a small amount.”
Coalition MKs spoke out against the budget, with MK Orly Levy-Abecassis (Yisrael Beytenu) complaining that the acclaimed Project Renewal, spearheaded by former prime minister Menachem Begin in 1977, was on the chopping block.
The program, meant to rehabilitate infrastructure and services in underprivileged areas, was adopted in 210 neighborhoods throughout Israel.
“If reports [the project will be canceled] are true, this is an inappropriate and immoral act that will impact many citizens,” Levy-Abecassis said. “It is unreasonable, to say the least, to cut from the places where citizens, neighborhoods and entire towns need any help they can get from the government.”
At the start of the meeting, Lapid responded to a recent outcry over the cost of food. Social media posts by Israelis in Berlin showing how much cheaper products were there have gone viral in Israel in recent days, reigniting a debate on the cost of living.
Like the cottage cheese protests that sparked the summer social protests of 2011, the pudding brand Milky became the centerpiece of this campaign.