The government must cut the 2013 budget by NIS 12 billion, the 2014 budget by NIS 21 billion, and the 2015 budget by NIS 26 billion to avoid breaching the budget frameworks that it set for these years, states Bank of Israel analyst Adi Brender in a document presented to S&P two weeks ago.
"The problematic commitments accumulated in the 2013 budget we pointed out when the 2011-12 biennial budget was approved, and definitely by November 2011, when we published the [quarterly] economic review. The points were forcibly reiterated in our report of February 2012, after the government decision [to approve the Trajtenberg Committee recommendations]. We pointed to the accumulated commitments and the growing problem," Brender, an expert in national accounts, told the Knesset Finance Committee.
The Bank of Israel's figures have practical consequences. First, they require massive, almost unprecedented, budget cuts, averaging 2% of GDP. Second, in contrast to previous years, there is no way to solve the problem by postponing or freezing expenditures, which the Ministry of Finance often tries to do to minimize cuts to particular pressure groups, such as freezing public sector salary hikes or postponing social projects. The reason is simple: the issue is not a single tough year, but several difficult years, which will require continual budget cuts that will actually increase over time. It is therefore necessary to cut the base of the state budget.
Brender's calculations are considered accurate because the Bank of Israel, unlike the Ministry of Finance, is not responsible for planning, writing, and implementing fiscal policy. Brender says that the difference between him and every top Ministry of Finance official is that they "are not bound to a government process. The ministry has a system, a minister who has to submit a budget to the cabinet. We, at the Bank of Israel, work as an external analytic agency which publishes analyses and we do not have the same formal commitment."
MKs and the media have lately been criticizing the Ministry of Finance for making up numbers, exaggerating the budget cuts that are needed, and concealing data. At the same time, demands by top ministry officials are growing to immediately institute the "automatic pilot", which describes the budget commitments accumulated in the past few years.
Brender does not support these criticisms, saying, "The data exist, they are published to the public. We simply collate the data, most of which is made public when decisions are made. We simply collated and quantified all these items, and subsequently monitor. The data is therefore available, as far as we are concerned, and this is proper. It provides a picture for the pilot. Obviously, there are formal figures at the Ministry of Finance; that is its job."
Brender says that his estimates are conservative, and that bigger budget cuts may be necessary. For example, a presentation by Governor of the Bank of Israel Prof. Stanley Fischer to the Knesset Finance Committee last week included a slide which stated that the automatic pilot indicates NIS 30 billion in higher spending in 2013, but because the spending cap increase permits only a NIS 15 billion increase in government spending, the government will have to cut already approved expenditures by NIS 15 billion - not the NIS 12 billion cut Brender mentions. The slide was concealed to avoid angering MKs, who were discussing the fiscal package's tax hikes.
The government announced the tax side of the fiscal package immediately after the S&P delegation left Israel. The package includes NIS 10 billion in tax hikes and two other plans - the tax plan for trapped profits and stricter tax collection - which are supposed to generate an additional NIS 5 billion, and which are due to be submitted to the Knesset for approval in the coming months.
On the spending side, the cabinet agreed to a NIS 700 million across-the-board spending cut by ministries on the basis of the 2012 budget and another NIS 500 million cut in the 2013 budget. These spending cuts were in turn reduced by Netanyahu's coalition partners Shas and Ha'atzmaut Party. As a result the necessary spending cuts were almost unchanged. The cuts will only be decided in the 2013 budget discussions, if they are ever held (or if elections are held instead). As "Globes" reported, the Ministry of Finance sees three places to cut the budget: public sector salaries (NIS 100 million); National Insurance welfare payments (NIS 75 million); and defense (NIS 65 million).
Published by Globes [online], Israel business news - www.globes-online.com - on August 6, 2012
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