Cabinet approves 2009-2010 budget

Economic Arrangements Bill passes with vote of 26 vs. 4; VAT raised by 1%; defense cut by NIS 1.5 b.

yuval steinitz 248 88 (photo credit: Knesset Channel [file])
yuval steinitz 248 88
(photo credit: Knesset Channel [file])
The passage of the 2009-2010 state budget in the cabinet on Wednesday will result in a year and a half of relative political quiet until the next budget must be passed in December 2010, sources close to Prime Minister Binyamin Netanyahu predicted on Wednesday night. Following an all-night session, the cabinet approved the draft budget after reaching a compromise with unions and employers that includes a plan to raise taxes in order to finance extra spending and implement an economic stimulus plan. Twenty-six cabinet members supported the budget, while the four Shas ministers voted against it. "We had to find the right balance between defense, social and economic needs," Netanyahu said in a briefing to reporters in Jerusalem. "Someone has to decide between the competing interests. This is a balanced and responsible budget." Netanyahu added that the ultimate result was good because it met two goals of the coalition's economic platform: approval of the government's stimulus plan and maintaining the goal of managing the deficit and decreasing the national debt. The budget must pass three readings in the Knesset by the beginning of July, but the prime minister's associates said this should not be a problem, due to the automatic support of 62 coalition MKs, not including Shas, which voted against the coalition in the cabinet, and United Torah Judaism, which does not have a minister. "Netanyahu succeeded in passing the budget without any costly strikes, and now there won't be any strikes or political turmoil that would prevent him from focusing on governing the country," a source close to the prime minister said. "He could have passed the budget easily with just the Likud and Habayit Hayehudi ministers, but he made a point of trying to please everyone." Despite the optimistic spin offered by Netanyahu, Defense Minister Ehud Barak and Finance Minister Yuval Steinitz on Wednesday, other coalition partners promised that the "balanced and responsible" budget would face a bumpy road during its Knesset approval process. "We took half of the 'goats' out of the budget in advance of the cabinet vote," said one Shas representative, "and the rest will come out during the Knesset readings." The 11 Shas MKs - together with the four Labor rebels - could give the coalition a run for its money by threatening to vote against the budget, which Steinitz said he hoped will pass all three Knesset readings in the next month and a half. The cabinet approved a "package deal" encompassing a 3 percent annual increase to spending under the 2009-2010 state budget, adding about NIS 8 billion in spending. This came after the government reached a compromise with the Histadrut Labor Federation and employers to scrap most of the welfare cuts proposed by the Treasury. "This is new type of management. It used to be that the Finance Ministry made the budget, the government would pass it and the Histadrut would go on strike," said Histadrut chairman Ofer Eini, who took part in the press briefing on the budget together with Shraga Brosh, president of the Israel Manufacturers Association. "The real winners today are the state of Israel and the economy," Eini said. Right after the vote, the Finance Ministry's budget supervisor, Ram Belinkov, handed in his resignation in protest of major changes to the Treasury's draft budget that were made in response to political and trade union pressure for fewer spending cuts. Netanyahu elaborated that Belinkov had proposed for the defense budget to be cut by NIS 5b. through the end of 2010, while Barak agreed to a NIS 1.5b. reduction as part of the 2009-2010 budget compromise. "I didn't think it was the right thing to do, to cut NIS 5b. from defense," said Netanyahu. "At the end of the day, the responsibility is mine. That said, I respect someone who says I can't agree with this decision, and therefore I am resigning." Under the budget compromise, there will be an across-the-board cut of 6.5% at all ministries both in 2009 and in 2010, which will add a combined NIS 3b. to state coffers. The government will raise value added tax on goods from 15.5% to 16.5% starting in July, and levy VAT on fruit and vegetables, which until now were exempt. Shas party leaders voiced opposition to a number of the clauses, including the changes to VAT. As part of the package deal, the 5% increase in public sector wages, which will cost the government NIS 6.4b., will be implemented as planned. The Histadrut in turn agreed to a partial salary freeze on annual payments for rehabilitation for a period of two years, which will save the state NIS 1.7b. The prime minister emphasized the importance of sticking to the planned income tax cuts, as they would encourage growth and were "the only way to realistically reduce unemployment." Bank of Israel Governor Stanley Fischer expressed some dissatisfaction with the state budget, warning against running large deficits while urging the government to delay the income tax cuts planned for the coming years. "At this moment the main challenge for the 2009-2010 budget in a time of a recession is the focus on the deficit. If the budget baseline is being raised, it is essential to pay for that extra spending, which in any case should be very small, by raising taxes," Fischer said at the Globes Capital Markets conference in Tel Aviv. "In particular, most of the financing could come from delaying the income tax cuts planned for 2010." Fischer called on the government to allow for a high deficit in 2009 but lower the planned deficit for 2010. As part of the 2009-2010 budget, the deficit ceiling has been set at 6% of gross domestic product this year and 5.5% in 2010. "A deficit profile of 6.5% this year and 5% in 2010, with further declines in years to come, is better," Fischer said. Sources close to the prime minister deflected criticism from the Left and the media about his handling of the budget process; the sources said they rejected the notion that every move Netanyahu made reflected on his character. Likud ministers privately attacked Netanyahu for battling Finance Ministry officials and for appointing an inexperienced finance minister in Steinitz. Labor Party officials even compared the appointment to former prime minister Ehud Olmert's decision to allow then-Labor leader Amir Peretz to be his defense minister despite his lack of military experience. Minister-without-portfolio Avishay Braverman of Labor, who is an internationally renowned economist, said he was glad Netanyahu accepted his advice to expand the budget spending framework, a move he had been advocating for the past 18 months. But he did express reservations over Netanyahu's behavior in his efforts to pass the budget. "It is important that Netanyahu has been doing everything with dialogue," Braverman said. "Everyone understands the management must improve and that Israel needs a better system of approving budgets." Opposition leader Tzipi Livni returned from a hiatus in parliamentary work and began an effort to stop the budget in the Knesset. She formed an anti-budget task force led by former finance ministers Ronnie Bar-On and Meir Sheetrit and divided Kadima MKs into committees to attack the budget on specific issues. Livni said she neglected to criticize the budget until Wednesday because she was waiting to see what the finished product would look like. Her associates said she did not need to be more vocal, because the media was attacking Netanyahu for her. "We have different opinions than the government on key issues, but I promised that if the government behaved responsibly, we would support it as a responsible opposition," Livni told the Kadima faction. "But instead, the government didn't behave responsibly. It lied, manipulated, mocked and said to hell with the public. But the public won't accept a government taking money from their pocket for its survival." She accused Netanyahu of "wild zigzags" in recent days that made the budget worse with every flip-flop. This sent a message of instability to the economy at a critical time, she said. "The economy is an issue that this prime minister is supposed to understand," Livni said. "I can accept a prime minister not understanding and making mistakes. What is unforgivable is that Bibi understands what is wrong with the budget but gave in to pressure and accepted it anyway, thereby harming Israel's ability to weather the economic crisis." Kadima MK Haim Ramon added that "the Netanyahu government lost its way" and accused the prime minister of "changing his mind every hour." "The bad old Bibi, who is good for the rich and bad for the poor, has unfortunately returned," Ramon said. The Likud responded that Kadima "had no right to attack the Likud after the damage they did to the economy over the past three years when they were in power."•