Ministry of Finance is currently preoccupied with arguments between Minister of Finance Bezalel Smotrich and his senior officials on the question of cuts in the revised 2024 budget including whether to raise taxes to pay for the war. The struggle has escalated into a campaign by the National Religious - Religious Zionism party, led by Smotrich, against the "out of touch" Ministry of Finance officials.
It could be that the quarreling is superfluous, since the new budget might not ever be passed. At least this is what the head of the National Economic Council, Prof. Avi Simhon proposes, several sources in the Ministry of Finance have told "Globes."
To bypass the legal hurdle
This won't be the first time that the Netanyahu government, supported by his veteran economic advisor Simhon, has prevented the state budget from being approved during an economic crisis. The previous time was during the Covid pandemic when Israel Katz became the first minister of finance in Israel's history to not pass a budget, mainly due to Netanyahu's political calculations. As an alternative, the government transferred more than NIS 100 billion in extra-budgetary 'boxes' and widened the fiscal deficit. The Ministry of Finance is concerned that a similar exercise is underway.
Implementing such an idea means that administration of the country over the coming year would be through the biennial budget approved in May 2023, which obviously did not include the needs of the war. But there is a legal problem. If a new budget is not enacted, the government will be obliged to present a huge budget excess plan of NIS 67 billion, according to Ministry of Finance calculations. Otherwise, it will be required to make an enormous across the board cut in the budgets of ministries.
Simhon has a solution to circumvent the legal hurdle. The government would legislate to break through the deficit limit established in the basic budget law. This would prevent the across-the-board cut. Instead of building a new budget, the government would set up an extra-budgetary box, which would be largely financed through increased debt. The fund would be set up for defense purposes, but the government might be able to charge it with other expenses indirectly related to the war.
How to fill a hole NIS 67 billion deep?
In practice Simhon represents Netanyahu in talks with the Ministry of Finance on the budget. Freezing the budget discussions will allow the government to avoid painful streamlining measures that are being requested by the Ministry of Finance, such as the cancelation of coalition funds and the closing of "unnecessary" government ministries. Simhon is probably willing to compromise at most on a cut of about NIS 5 billion, less than 1% of the overall budget of more than half a trillion shekels. Simhon is also not interested in talking about canceling tax benefits. Nor is he concerned that the deficit will rise to high levels, because in his opinion the Israeli economy will experience a rapid recovery after the war, as happened after the Covid pandemic.
The budget discussions for 2024 currently taking place at the Ministry of Finance, are focused on how to fill a NIS 67 billion deep budget hole. This pit was dug at the bottom of the state coffers mainly because of the war, but it started to form even earlier during the days of the government's judicial reform. Without budgetary cover for this this huge amount, the deficit will jump to a dangerous level of 6%, according to the latest Ministry of Finance forecasts.
Ministry of Finance officials want to fill about half of the hole through cuts in the government budget as well as increasing revenues through higher taxes on the public. The balance, through lack of any other choice, would be raised by issuing bonds.
On the other hand, Smotrich has proposed plugging the hole with a mix of 85%-90% loans at the expense of increasing the deficit, plus minimal streamlining measures. Simhon's proposal is even more extreme and practically does not limit the deficit. He would spend as much as he can, even if the result is a deficit of about 6%, which is a deficit of about NIS 115 billion in the state coffers.
It would be too simplistic to describe the fight over the 2024 budget as a two-sided fight between Smotrich and senior Ministry of Finance officials. At one end, there are officials who support the classic fiscal stance that supports sharp fiscal restraint. At the other end, the "optimistic" approach, according to which there is enough money for everything, with Simhon as the most optimistic. Even if Smotrich wanted to pass a responsible budget, it is very doubtful if he will get Netanyahu's backing for this. So Smotrich prefers not to be the bad guy and is stressing that any thoughts about painful cuts is the sole responsibility his officials.
In reality, the Ministry of Finance officials are not of one mind. Among them is different shades of opposition to the intentions of the political echelon. If to the right of Smotrich on the ideological axis is Simhon, then just to his left is Ministry of Finance director general Shlomi Heisler.
Heisler is a mediating and conciliatory figure, trying to pull Smotrich in a more restrained direction, and is not even afraid of a proposal to raise VAT by 0.5% to help balance the budget. Heisler is pulled to the left by budget division head Yogev Gardos.
Gardos is under pressure from within the division, from some of his deputies and coordinators, who think that the budget division should more resolutely oppose the political intentions of using the war as an opportunity for wildly distributing funds.
Sources within the Ministry of Finance say that behind all the fights, the gaps between Smotrich and the budget division are not really that big. According to them, Smotrich is in a trap. He knows that if he goes with the budget department, he won't really be able to provide them with the goods because of Netanyahu.
Published by Globes, Israel business news - en.globes.co.il - on December 26, 2023.
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