The proposed budget cut that the Ministry of Finance put on the government’s agenda today is an attempt to put out the spreading budgetary brushfire. The cutback actually amounts to NIS 1.64 billion, since it affects only the second half of 2001, although the government is being asked to approve a total reduction of NIS 2.8 billion.
According to the Ministry of Finance, the two main sections of the proposal are financing the Ministry of Defense budget supplement through a 4% spending cut and freezing the extension of child allowances for families with five or more children.
These two sections are to provide most of the money for financing the extra defense spending. The Ministry of Finance warned that the budget supplement is impossible without the reduction in other spending.
The link between the two sides of the equation – defense spending and reducing other spending – is the strong suit of Minister of Finance Silvan Shalom’s proposal. The proposal confronts the ministers with the stark fact that government spending should not be permitted to rise and the tax burden should not be increased. In this sense, Shalom acted responsibly and even restrained Prime Minister Ariel Sharon’s appetite for spending.
One problem with the Ministry of Finance’s proposal is that it leaves two important points unsettled. The first is to how much the government will attempt to reduce spending in order to finance the expected fall in tax revenue. As the International Monetary Fund report a week ago stressed, a degree of deviation from the deficit target is tolerable when an economic slowdown reduces tax revenue. If the fall in revenue is too steep, however, such as the pessimistic forecast of a NIS 3 billion shortfall, the Ministry of Finance will have to act to cover at least a part of this sum.
Another problem, the most important one, concerns the 2002 budget. It is pointless to propose to lower spending now, when in three months the same ministers will be called upon to approve a still larger deeper cut to finance next years’ requirements. Keep in mind that a large part of the budget supplement for the current year will continue into 2002, or even beyond that.
We can already anticipate that the Ministry of Finance will have to formulate its budget proposal at a time when the tax revenue at its disposal will be lower. The problems will be the same as those that cropped up this year, but on a larger scale. It would therefore be better for the Ministry of Finance to take this into account and submit an operating plan for 18 months to the government, rather than a one-year budget.
From Shalom’s perspective, separating 2001 from 2002 is smart politics. It can be assumed that the cutback submitted to the government today will encounter serious obstacles in both the Knesset and the government itself. If 2002 were included in the proposal, perhaps no element of either plan would pass.
That is the guiding consideration in this case. This means that the Ministry of Finance’s proposal is largely one of political expediency. In another two or three months, the second part of the plan will be submitted, under the assumption that this procedure will enable more measures to be passed with greater ease than if the political leadership had had to deal with all the elements simultaneously.
Published by Israel's Business Arena on May 20, 2001