Senior Ministry of Finance officials yesterday presented to Prime Minister Benjamin Netanyahu the extent of the budget cut needed to meet the spending cap in the 2013 budget, as well as the possible composition of these cuts. This was the first such meeting with Netanyahu on the subject, and it included several alternatives.
On Sunday, Prime Minister's Office director general Harel Locker will hold a preparatory meeting with National Economics Council chairman Eugene Kandell and top Ministry of Finance officials. The meeting will last several hours.
Sources inform ''Globes'' that the Ministry of Finance wants to cut the 2013 budget by NIS 12 billion, and that the real objective is achieve a NIS 9 billion cut, after negotiations. The Bank of Israel states that a budget cut of NIS 11 billion is needed.
One source involved in the talks said, "This is a well-known game by the Finance Ministry. There are no surprises. But painful measures will be needed."
Defense, public sector salaries, or child allowances
As "Globes" reported, economic policies being drawn up by the Ministry of Finance over the past couple of months have put maintaining growth and jobs as key goals, while also preserving equality of opportunity. Ministry officials therefore want to avoid cuts in education, infrastructures, and jobs, which seems impossible. Moreover, ministry officials told "Globes" that there is no choice but to delay projects. "There will be supplements for infrastructures, but there will be fewer supplements than planned," said a senior official.
The Ministry of Finance's three preferred places to cut the budget are defense (which has a NIS 60 billion budget), National Insurance allowances (NIS 75 billion), and public sector salaries and benefits (NIS 100 billion).
After the Ministry of Finance's first failure in its campaign against Minister of Defense Ehud Barak, cutting the defense budget seems unrealistic, and the argument will be over the size of the defense budget supplement. Cutting public sector salaries and benefits, such as previously agreed pay hikes, will ignite a war with Histadrut chairman Ofer Eini, who is already battling Minister of Finance Yuval Steinitz.
This year, the Ministry of Finance and the Histadrut (General Federation of Labor in Israel) have to sign a new collective contract. Civil Service Commissioner Moshe Dayan is also due to announce a comprehensive civil service reform this year, which includes differential salaries, rotation, and drastic changes in personal contracts.
The last source for budget cuts is National Insurance allowances. Netanyahu has already hinted that he will not touch old-age pensions, which leaves the child allowance in the gun sights. This will cause a head-on clash with Netanyahu's haredi (ultra-orthodox) coalition partners Shas and United Torah Judaism.
Barak supports a bigger deficit
Senior Ministry of Finance officials outlined the alternatives to Netanyahu, Locker, and Kandell. Since cutting the defense budget is a non-starter, which means steep cuts in public services and allowances. Netanyahu has vetoed cutting the education budget for preschoolers, one of the flagship proposals of the Trajtenberg Committee, which Netanyahu set up, and which will cost more than NIS 2 billion. This may be why, for the first time since the government took office, coalition whip MK Zeev Elkin (Likud) attended the meeting, in order to assess the political chances of implementing the budget cut.
"There won't be a NIS 15 billion budget cut, but there must be a cut of NIS 8-9 billion. I don’t see how the current coalition will be able to pass it," said one party involved in the talks. This strengthens the probability that there may be no choice but early elections. This likelihood has increased lately, in view of the unprecedented delay in drawing up the budget.
Meanwhile, disputes continue between the Bank of Israel and the Ministry of Finance over the need for an additional NIS 4.5 billion in tax hikes, on top of the tax hikes included in the fiscal package approved by the Knesset in early August. The Bank of Israel believes that without more tax hikes, the budget deficit will exceed the new deficit target of 3% of GDP by half a percentage point.
This government faces three options: the most talked about are passing the budget cut needed to meeting the fiscal rules, or to go to early elections. But there is a third alternative: go to the Knesset and ask to raise the spending cap, which means increasing the 2013 by more than the 2.8% increase set by law, and breaching the budget framework. This would free up part of the NIS 15 billion in Netanyahu's unfunded spending. All the parties involved in writing the budget refuse to discuss this alternative, and say that it is not on the agenda. Barak is an enthusiastic supporter of this alternative, saying that Israel should increase the 2013 budget deficit to 8% of GDP in view of the country's security, social and economic challenges. But this alternative could bring the Israeli economy to a financial crisis.
Published by Globes [online], Israel business news - www.globes-online.com - on August 28, 2012
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