Bar-On presents largest budget in history

Budget deficit will widen to around 1.6 percent of gross domestic product in 2008 as defense and education allotments rise and economic growth slows.

By MATTHEW KRIEGER
bar-on 88.298 (photo credit: Ariel Jerozolimski [file])
bar-on 88.298
(photo credit: Ariel Jerozolimski [file])
The draft of the largest budget in the nation's history was unveiled on Sunday by Finance Minister Ronnie Bar-On, who asked the cabinet to work together to approve the NIS 311.6 billion plan. "We have been working on this budget for quite some time now and have overcome significant challenges in putting it together," Bar-On said. The budget deficit will widen to around 1.6 percent of gross domestic product in 2008 as defense and education allotments rise and economic growth slows, the Finance Ministry said. Vowing to resist pressure to increase spending above targeted levels, the new Finance Minister said: "I've heard calls for the government to break its policy of holding the spending ceiling to 1.7% [of GDP] in 2008. There have been different ideas about how to do this, but my position is very clear - Israel must preserve fiscal responsibility." The 2008 state budget will be presented to the cabinet next Sunday, which needs to approve the plan before it can be sent to the Knesset. "We operate in a world and a society in which certain things must be placed before others," said Bar-On. "The 2008 budget is based on a clear and consistent structure and the government decided to emphasize a socioeconomic agenda. The 2008 budget reflects this policy." The new budget will increase spending for education by some NIS 3.9b., most of which will be slated for a rise in teachers' salaries and an incentives package for them, and an attempt to curb the brain drain to overseas. "The increase in education won't really be felt, said Dr. Roby Nathanson, director of the Macro Center for Political Economics in Tel Aviv. "Most of it will go toward higher salaries, and students won't benefit from the increase." Immigrant Absorption Minister Ya'acov Edri threatened to wage "a world war" to prevent the Finance Ministry from cutting customs benefits to new immigrants. He said he would vote against the cuts, which are intended to save the state's coffers NIS 38 million. "We are in the middle of a battle and the fight is not over," Edri said. "The cuts send the wrong message to potential Western immigrants. Aliya is the essence of Zionism. It strengthens the state and ensures its future." Welfare spending, which includes increased payments to Holocaust survivors, will rise by some NIS 1.3b. The Finance Ministry plan expands the defense budget by NIS 1.6b., in addition to the NIS 2.5b. allocated for costs arising from the Second Lebanon War. Defense officials, however, have said the increases fell far short of the needs of the IDF and the Defense Ministry. While Bar-On said on Sunday that the proposed defense budget recognized Israel's "strategic reality," defense officials again blasted the Treasury for refusing a request by Defense Minister Ehud Barak to increase the budget by NIS 5b. In line with the Brodet Report, Bar-On said the defense budget would be increased by more than NIS 40 billion over the next decade. But defense officials said this would not be enough and that without additional funding the IDF might be forced to cut training and procurement plans for reservist as well as for units performing compulsory service. "The government needs to understand that without additional funding we just won't be able to effectively counter all of the growing regional threats," an official in the Defense Ministry said. "The government needs to ask itself what type of military it is interested in having." Last week, Barak brought the cabinet a proposal to increase the defense budget by NIS 5 per year. That proposal was however rejected by Prime Minister Ehud Olmert. At the press conference introducing the draft budget, Bar-On said the government could only can exceed its spending targets in special cases, as it did for the Lebanon war. "Israel must adopt budgetary responsibility as a way of life. A departure from fiscal policy is possible only if there is an extreme change in circumstances. We must rid ourselves of the illusion, which has gained momentum, that we have sources of funding that can be spent for any purpose. A responsible state cannot increase its spending unless revenues increase," he said. Olmert is not going to have an easy time passing the budget, however, as key cabinet members have already said they intend to vote it down unless changes are made. Industry, Trade and Labor Minister Eli Yishai of Shas warned over the weekend that if his ministry did not receive an additional NIS 750m., he would vote against the budget in the cabinet, while sources in the Prime Minister's Office believe the Labor Party would, for political reasons, also oppose the budget. According to the Treasury's Budget Director Kobi Haber, the state is expected to post a deficit this year of between 1% and 1.5% of the Gross Domestic Product, instead of the 2.9% that had been predicted. In 2008, however, Haber said economic growth was likely to be the slowest since 2003, with the GDP now projected to grow some 4.2%, instead of the hoped for 5%. The budget includes a package of structural changes, including legislation to increase competition in banking by widening the operations of the state-owned Postal Bank and increase competition in public transportation by opening more bus routes to competitive bidding. If the 2008 budget is not approved by the Knesset by December 31, the government will continue to operate under the 2007 state budget. If the budget is not approved by March 31, the government falls and early elections are scheduled. Yaakov Katz, Gil Hoffman and Bloomberg contributed to this report.