2016 Budget: Not just numbers

During the Knesset budget debate, MKs seemed to represent only narrow sectoral interest groups.

By SHLOMO MAITAL
Moshe Kahlon (photo credit: EMIL SALMAN/POOL)
Moshe Kahlon
(photo credit: EMIL SALMAN/POOL)
PITY THOSE 120 Knesset Members.
Their 40,000 shekel monthly salary (about $10,000), plus expenses, nearly four times Israel’s average wage, is not enough to pay for the torture they endure at the annual budget debate.
On September 2, each MK was asked to show up at the Knesset and read 2,000 pages of tightly packed numbers, stacked as high as an elephant’s eye, before voting on the first reading of the 2016 budget.
They had to listen to many hours of speeches, mostly by MKs who had probably not read even the budget summary.
And they had to be there, coalition and opposition alike, because the coalition government rules by a majority of just one.
The budget passed the first reading with a narrow majority of 57 for and 53 against.
The 2016 budget is not just numbers. It is about people and the resources government will provide to make their lives more secure, more happy. The budget presented by 54-year-old Finance Minister Moshe Kahlon (“this budget serves the people, rather than the people serve the budget”) is actually an extremely interesting document, one that matters deeply to all of us.
It was born in the bowels of the Finance Ministry offices. Ministry economists in the Budget Division, headed by Director General Shai Babad and Budget Department head Amir Levi, labored long into the night during the sweltering summer to square the circle and meet the demands of coalition politics while maintaining fiscal stability.
Culture and Sport Minister Miri Regev demanded an extra 50 million shekels.
Education Minister Naftali Bennett got a lower than planned budget cut for his ministry. Public Security Minister Gilad Erdan won an added 1.7 billion shekels, over two years, for his ministry.
Then, the budget was brought before the cabinet for approval. That vote took place August 6. Some 20 ministers voted “aye” with only Defense Minister Moshe Ya’alon abstaining in protest against the Locker Committee recommendations, which advised controlling defense spending.
The budget was then revised, polished and readied for the Knesset. After the first reading, the budget was referred to the Knesset Finance Committee.
This budget is long overdue. It should have been ready last November, but Prime Minister Benjamin Netanyahu chose to call an election in March, which froze the existing 2014 budget for more than a year.
That turned out to impact on all of us badly.
The reason? The government implemented an austerity plan in 2015 entirely by accident.
When a new budget is not passed in time, the spending levels of the old budget remain in place. Ministries can spend 1/12 of their annual allocation each month, so public spending was kept low. But, by chance, three factors conspired to boost revenues.
First, people accelerated their purchases of real estate and housing in advance of expected new taxes. This brought a tax windfall of a billion shekels in July alone.
SECOND, CAR sales rose dramatically as the slumping euro made prices cheaper.
And cars are heavily taxed. Third, Israeli start-ups were acquired at a record pace, generating large taxes on capital gains.
So, in July, for the first July in decades, the government budget showed a substantial 2.6 billion shekel surplus ($681 million).
Good news? Not really. Second-quarter Gross Domestic Product showed the economy slowed abruptly, growing only 0.3 percent, partly because of the budget austerity, with government (unintentionally) soaking up purchasing power. With the world economy slowing, austerity is probably the last thing Israel needs right now.
A budget surplus is, for politicians, like a loaded gun. Politicians of all stripes stand in line to aim and fire, with ideas for spending the surplus to the benefit of their supporters. And the Finance Ministry, mainly young persons with graduate degrees in economics, man the barricades to prevent it.
The annual budget shows that a vast amount of tax revenue flows into government coffers. Netanyahu has said that “the citizens… will make better use of it [the money] than the bureaucrats would.” But I’m not sure. Roads, rails, schools, public housing, broadband, universities, R&D, gas pipelines, aren’t these more socially profitable than the stuff we see in our shopping centers? Since 1985, the annual budget has been accompanied by an EAB – an “economic arrangements bill.” This is a piece of legislation that includes a smorgasbord of economic reforms, mostly not related to the budget at all.
Why then make the EAB part of the budget process? The answer is simple.
The vote on the budget is a vote of confidence.
If the government loses, it must call elections. So the Finance Ministry tosses all its favorite legislation into the kitchen sink of the EAB, knowing that coalition members dare not vote “no.”
This is a mild form of political blackmail.
It is a rather dubious way to bypass democracy, widely criticized, but nonetheless the EAB has been a Knesset institution for three decades and probably will remain so. Knesset Speaker Yuli Edelstein, who has proved highly effective, asked Kahlon to remove 15 items from the EAB, and move three more to committees other than Finance.
So, what is the 2016 budget all about? Total spending is 415 billion shekels ($106 billion), including a large payment to National Insurance of 63b. shekels. Not including National Insurance, spending will be 347.7b. shekels, compared with revenue of 313b. shekels, implying a deficit of 35b. shekels, or about 2.9 percent of Gross Domestic Product, up from 2 percent in the last budget. A major part of taxes (39 percent) comes from taxes on spending (134b. shekels), as opposed to taxes on income (140b. shekels). This is problematic, because taxes on spending are harder on the poor, compared with taxes on income, which levy higher rates on the rich.
The government’s “cash cow” is Value Added Tax (VAT), recently reduced from 18 percent to 17 percent, which will bring in just under 71 percent of all indirect taxes. Some analysts believe Kahlon cut VAT to keep revenues from growing too quickly and then be channeled, as often happens, to defense spending. This reveals just how hard it is to keep the Defense Ministry’s hands off our tax money.
The biggest ticket in the budget is, of course, defense, at about 56b.-57b. shekels.
That number is still written in pencil, as Ya’alon still has not agreed to it. Somehow, every year, the Defense Ministry finds ways to get billions of shekels in supplementary spending beyond its budget allocation.
When you lump all the “social services” all together, including health, education and welfare, you get a healthy 142b. shekels, or 41 percent of all government spending.
THE SECOND biggest item is education.
The Education Ministry will spend 52b.
shekels in 2016. Moreover, while defense spending has grown fairly slowly, from 50b. shekels in 2005, education spending has doubled, from only 25b. shekels in 2005, and is planned to increase significantly. If Israel has deep problems with how it educates its children, it cannot be because of a lack of resources.
Health Ministry spending, too, has doubled, from 15b. shekels in 2005 to twice that in 2016. Health Minister Ya’akov Litzman (United Torah Judaism) has been upgraded from deputy minister to minister, following a Supreme Court ruling requiring this step.
One of the most effective budget critics is Zionist Union MK Erel Margalit.
Before his election to the Knesset, Margalit was a successful venture capitalist.
He noted, according to The Jerusalem Post, that 60,000 small businesses shut down in 2014. (He might have mentioned that far more than 60,000 new small businesses opened.) “Israel is going through one of its worst downturns,” he cautioned. “For a country like Israel, that has so much innovation and capability, to be so weak, is unacceptable, and it’s been going on for way too long.
…These guys don’t know how to run the economy. Sector by sector, people are being left behind.”
Notably, Israel is relatively unburdened with debt. Public debt is only two-thirds of Gross Domestic Product and, as a proportion of GDP, is falling. In the United States, by comparison, public debt is still growing and exceeds annual GDP.
The few who watched the Knesset budget debate on Channel 99 may have been disappointed or angered, as I was, by the narrow sectoral interest groups that MKs seem to represent. The ultra-Orthodox parties, for instance, supported the budget largely because of the expanded child allowances in it. Surely, we elect MKs to plumb their consciences and ask, seriously, is this budget good for the people overall, or is it not? To answer this question, they need to do some serious study of that mountain of numbers. In fairness, I should note that much of the really serious debate occurs in the Knesset Finance Committee, which gets down to brass tacks in a long, extended series of sessions.
Perhaps the 2016 budget is not the most effective or best-designed in the world.
But I can make a good case that the unique event organized in the Rose Garden outside the Knesset truly was.
A Jerusalem NGO called “New Spirit” organized a “Budget Party.” New Spirit says it offers creative people grants to make their wildest fantasies come true, along with helpful training. Their budget party included huge screens broadcasting live the Knesset budget debate, along with critiques by experts and journalists.
There was a contest testing participants’ deep knowledge of the budget. I would have asked, how come the public housing budget is less than the rounding error in the defense budget? And, while we’re at it, why not require MKs to take the same quiz, with 6/10 a minimum score to enable them to vote? There was a rock band called Naj Hamadi, and, finally, yes, there was a party. A real one, the kind with music and food, not the political version.
I like New Spirit’s spirit. Democracy and a superfluous election cause the key government budget to be delayed by over a year? Throw a party. Make it BYOD – bring your own deficit. ■
The writer is senior research fellow at the S. Neaman Institute, Technion and blogs at www.timnovate.wordpress.com


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