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Netanyahu 370.(Photo by: Moshe Milner/GPO)
PM backtracks on budget cuts for political allies
Change comes despite BoI governor saying deficit reduction necessary to shield economy; c'tee passes 1% VAT increase.
Despite dire warning from Bank of Israel governor Stanley Fischer and the imposition of unpopular tax hikes to lower the deficit, Prime Minister Binyamin Netanyahu backtracked on some NIS 160 m. of planned across-the-board budget cuts for his political allies on Wednesday.

First, Shas chairman Eli Yishai announced that Finance Minister Yuval Steinitz will restore NIS 60 million in cuts to the Shas-controlled Interior and Construction and Housing ministries.

"Local authorities in Israel and thousands of poor people who need housing were saved today from a sharp cut because of our uncompromising stance on their behalf," Yishai said.

Then, Army Radio reported, Netanyahu agreed to restore some NIS 100m. of cuts from Defense Minister Ehud Barak's ministry.

The announcements came just hours after Fischer told the Knesset Finance Committee that things do not look good for the Israeli and world economies, saying that Netanyahu's controversial fiscal package of tax increases and budget cuts was necessary to shield the economy.

Fischer said that Israel currently pays 4% of GDP a year on interest for previously issued bonds, saying that reducing the deficit would lower this interest rate. "This amounts to about NIS 40 billion. With this money, we could do many things, which is why we must not let the interest rate rise," he said.

Fischer criticized calls for increasing the deficit, which would leave people with a lower tax burden and provide more government benefits, saying, "we've already raised the deficit. This increases the burden on the following generations."

The 2013 deficit, he said, would reach 4.5% of GDP if taxes are not raised, and may even pass 6% thereafter.

The committee obliged, passing the 1% increase to the Value Added Tax (VAT), which the cabinet approved Monday as part of a series of sweeping austerity measures that it hopes will raise NIS 14-15 billion next year and reduce the budget deficit by 1.5%

The possibility of a split in the Euro zone could lead to financial crisis, or even a "Lehman Brothers II," Fischer said. The collapse of the Lehman Brothers investment bank in 2008 sent the world economy plummeting.

"The facts are that things do not look good. There is a not small probability of a severe recession in Europe, and if that happens, it will affect us," Fischer said. "We see growth forecasts for the US of just 2 percent. Europe is in a recession, and there will be very weak recovery next year," Fischer said, predicting that Israeli exports would be weak for several years to come.

Labor leader Shelly Yechimovich blasted the economic plan as unjust, saying Netanyahu was uniquely and ingeniously creative at finding new ways to impose a greater tax burden on the poor and the middle class.

Yechimovich said that the tax hike falls hard on those making between NIS 9,000-42,000 per month, who she called the creative backbone of the economy.

Gil Hoffman, Nadav Shemer and Globes contributed to this report.
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