Lapid's higher deficit is just technical

Avi Temkin

Finance Minister Yair Lapid is sticking to his guns, and continues to put the working man in the crosshairs.

To paraphrase Mark Twain, reports of the death of Minister of Finance Yair Lapid's budget policy are premature. In substance, there is nothing has changed in the minister's plans, and the package of measures will come into effect at the end of the year, more or less on schedule. All that Lapid and his officials want to avoid is a situation in which the Israeli government will formally breach the Basic Law: the State Economy (5735-1975) in 2013. To comply with the law, they are changing its content for a limited period.

The big headlines about Lapid's "retreat" from the budget cuts may reflect a lack of confidence in his ability to keep his word, but, at least for now, that has not happened. Lapid is sticking to his guns, and continues to put the working man in the crosshairs: raising VAT; cutting transfer payments; cancelling public sector pay hikes; and cutting, on paper, the defense budget. He is also keeping his agreement with his brother in arms, Minister of the Economy Naftali Bennett, under which money flowing over the Green Line will not be touched.

Officially, the state budget for which the Knesset will pass will be for 2013-14. The measures of Lapid and his officials are supposed to reduce the deficit beginning from the fourth quarter of this year, but when the statistics are calculated for the year, they will show that the deficit cap permitted by law has been exceeded, because of the expenditures until the new budget law comes into effect. Technically, the government will be considered as having passed the law which caps the growth in government spending and the size of the budget per year, which is why it is seeking to amend the law as it applies to 2013.

On the macroeconomics side, the question about Ministry of Finance's announcement is, what is the significance of the spending cuts and tax hikes in the short term. Since these will officially come into effect in the last third of the year, the impact will be felt in early 2014. Under the prevailing conditions in Israel and globally, we cannot expect growth in private consumption and investment, and we cannot assume any substantial growth in exports.

In other words, the government's measures, at least in the short term, will reduce economic activity and tax revenues. The question is whether this has been taken into account, or will Lapid again face, in mid-2014, the need to adjust public spending to smaller than expected tax revenues? Experience shows that the Budget Department and Tax Authority can offer a revenues estimate today on the basis of current models, but they cannot promise Lapid or the government if this scenario will materialize next summer. That will no longer be a technical matter.

Published by Globes [online], Israel business news - - on May 2, 2013

© Copyright of Globes Publisher Itonut (1983) Ltd. 2013

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