Key gaps remain between Lapid, Netanyahu on budget

Government approves $1.3b. investment plan for Sderot and Gaza border towns; Prime minister: We must maintain our responsible economic policy.

Prime Minister Binyamin Netanyahu (R) and Finance Minister Yair Lapid embrace in the Knesset. (photo credit: REUTERS)
Prime Minister Binyamin Netanyahu (R) and Finance Minister Yair Lapid embrace in the Knesset.
(photo credit: REUTERS)
Despite signs they were nearing a deal on the 2015 budget, Prime Minister Binyamin Netanyahu and Finance Minister Yair Lapid failed to agree on key issues in a working meeting Sunday.
Reports surfaced over the weekend that the two had reached an agreement that would set the deficit at 3.4 percent of GDP – significantly higher than the original 2.5% target – add NIS 6 billion of a requested NIS 11b. to the defense budget, and move Lapid’s controversial zero-VAT housing plan forward. Lapid’s promise not to raise taxes would remain intact.
But even as the cabinet moved ahead with plans to invest in Sderot and border towns near Gaza, whose regular exposure to rockets has wreaked havoc on their local economies, Netanyahu took a public stand against raising the deficit too much.
“Standard and Poor’s has maintained Israel’s A+ credit rating, but it must be noted that they said that this is based on the assumption that Israel will continue the responsible economic policy that we have led in recent years and not deviate from it,” he said at the start of the cabinet meeting.
On Friday, the credit ratings agency kept the outlook for Israel as “stable,” a decision the ratings report said “reflects our opinion that the consensus in Israel’s government to maintain prudent public finances will continue to anchor fiscal planning and stabilize government debt.”
Better than expected fiscal performance could lead to an upgrade, the report noted.
Netanyahu specifically cited security needs as priority alongside economic responsibility.
Defense Minister Moshe Ya’alon is reportedly dissatisfied with receiving only half of the additional funds he requested.
Bank of Israel Governor Karnit Flug has warned that the deficit should not rise above 3% of GDP, and argued that raising taxes would be less economically damaging than cuts to civilian spending in education, health and welfare.
The plan reportedly in the works between Netanyahu and Lapid would ignore both recommendations.
Even so, the math may not add up.
“It’s possible that the target the Finance Ministry is talking about today is not attainable,” said Psagot Investment House economist Ori Greenfeld in his weekly review. Even before the NIS 6b. defense budget increase, he noted, the budget was heading toward a 3.5% deficit.
That said, Greenfeld argued, a deficit increase was preferable to budget cuts or tax increases, so long as the government presented a credible plan to bring down the deficit in the future. In the meantime, the cabinet approved a NIS 1.3b. five-year plan for the development of poorer communities in Sderot and the region adjacent to the Gaza Strip, which it said was “the largest and most comprehensive economic development plan ever made for the area.”
The plan would add to the NIS 417 million transferred to the region during Operation Protective Edge in July, and will go toward building a new industrial zone in Sderot and boosting transportation infrastructure.
On Tuesday, Netanyahu is set to submit a NIS 2b. plan to help rehabilitate other cities in the South affected by the rockets.