The framework
The budget framework grew, pretty much overnight. Government spending was supposed to rise by 1.7% - in itself a figure that was the result of a compromise in the days of the government of Ariel Sharon. Instead, it rose by 3%. The reason for that is mainly the desire to maintain the size of the defense budget, along with a vague promise that it will be cut by NIS 1.5 billion in 2010. Minister of Defense Ehud Barak tried many times in the past, even when he was chief of staff, to combat the trend of falling defense spending as a proportion of GDP. This time, he succeeded, and the bill will be presented to the citizens of Israel. In the long term, when the politicians face an emergency, the defense budget --- particularly that part of it that has nothing to do with the fighting forces but is extra fat --- will have to undergo surgery.
The deficit
To save Prime Minister Benjamin Netanyahu's honor, and the government's credibility, it was agreed that the deficit would not grow, despite the rise in spending. This means that the deficit target remains 6% of GDP. To reach that number, several measures were invented that, on paper, should bring in the required amount, a little over NIS 6 billion. The measures are higher taxes and an across the board cut in ministerial; spending, to ensure that total spending does not exceed the expanded framework.
That's on paper. The question is, what will happen if, in a few months time, the Ministry of Finance's computer spits out worrying numbers --- if, for example, the cumulative deficit rises alarmingly. That is a reasonable scenario, and so we can expect another round of the budget marathon, sometime towards the end of the first quarter of 2010. For the time being, the government can breathe easy. The political compromise has ensured its continued existence.
The second round
There's a budget, and most importantly there's a government. Now begins the planning for the real budget, the one that the Ministry of Finance will put together over the coming months and present for approval at the first opportunity. The lever will be the desire to defend the deficit ceiling. An unwritten law in the ministry's budgets division says that what isn't accepted one year will be accepted the next, or the year after that. Many measures ruled out this year will return next year, or in 2011. The Ministry of Finance doesn't forget, and doesn't erase. It only puts proposals in a drawer and waits for an opportunity. I have already said that the defense budget will be put on the block again; the health and education budgets will as well. On the next few months, the budgets division will be engaged in rehabilitation, reorganization, and preparation of the materials for the amended budget in a few months time.
Regressive taxes
Benjamin Netanyahu promised that he would not raise taxes, but would lower them. That was in the election campaign. The updated version of that statement is that he will not raise income tax rates or company tax rates, but will lower them. VAT is to rise by 1%, and it will be imposed on fruit and vegetables too. The main burden will of course fall on those whose spending on necessities is a larger part of their income, or in simple language, those whose incomes are low.
Robin Hood taxes
Since VAT is a regressive tax, and Netanyahu is determined to cut income tax, measures were put in the budget that theoretically should hit the pockets of high income earners. These are higher taxes on luxury cars, and a rise in the income ceiling for national insurance payments. It is not clear how many people in the Tax Authority believe that these measures will lead to a more just distribution of the tax burden, but past experience shows that they will prove pointless. On paper, they will yield revenue of some NIS 1 billion, but a large part of the taxes will be diverted to companies owned by those high earners, or where they are employed as managers. The obvious solution, raising the highest marginal rate of income tax, was removed from the agenda in advance by the prime minister.
Package deal
The political compromise at the basis of the budget is the package deal. Higher VAT, a freezing of recuperation pay, and a cut worth NIS 1.2 billion in workers' salaries. The great achievement of Histadrut chairman Ofer Eini, and it shouldn't be denigrated, is the changes in legislation that will mean protection for workers who seek to organize and form unions and to sign collective wage agreements. The problem is that this package was joined together with the compromise between Netanyahu and Barak on the defense budget. All the arguments of the Ministry of Finance officials against the path outlined by Eini and Manufacturers Association president Shraga Brosh were trashed. In effect, the state budget is made up of the Eini-Brosh line plus the demands of Barak and Minister of Education Gideon Sa'ar.
Published by Globes [online], Israel business news - www.globes.co.il - on May 14, 2009
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