Prime Minister Ariel Sharon and Minister of Finance Silvan Shalom decided last night on a series of emergency economic measures, due to the deepening recession.
Sharon and Shalom will meet coalition heads in the coming days in order to convince them to support the budget cuts and economic measures. The move follows the Ministry of Finance's statement that it would not resubmit the 2002 state budget to the Knesset if the necessary changes were not included. Last night, Sharon spoke with Minister of Foreign Affairs Shimon Peres and Shas party chairman and Minister of the Interior Eliahu Yishai.
The new economic plan will prevent Israel's international credit rating from being downgraded. Senior economic officials in Jerusalem said an additional NIS 3-4 billion budget cut will be necessary in 2002, in order to guarantee that the government will meet its new budget deficit target of 3% of GDP.
Sharon accepted the Ministry of Finance's proposals to cut the 2002 state budget by NIS 6 billion. The cut will affect all ministries, including the ministries of education, health, and defense. The cut is in addition to the NIS 4.5 billion cut decided on in August. Part of the cut will be instituted through a uniform lowering of current expenditures by all ministries.
The total 2002 budget cut could therefore ultimately reach NIS 14 billion.
Following are the main planned cuts:
- Some National Insurance Institute payments (child, income support, and unemployment insurance) will be frozen, for a total savings of NIS 1.2 billion. Old-age and disability pensions will be unaffected. It was also proposed that the eligibility criteria for unemployment insurance and income support be made more stringent, in an effort to force the unemployed to join the labor force.
- An effort will be made to cancel private MK legislation. However, a senior Shas source has already announced that the Large Families Law "will not be cancelled."
- Taxes will be raised by NIS 1 billion, mostly through additional fees and levies. These include a NIS 10 per month health levy for insured people and a special NIS 100 per day hospitalization fee. The Ministry of Finance is also considering imposing a tax on cellular telephones provided by employers. Taxes may also be levied on interest from bank deposits as part of the income tax mini-reform, which will also include raising the net tax threshold and widening the brackets for middle and lower-income earners.
The official 2002 growth forecast was lowered from 4% to 2%. Some senior Ministry of Finance officials believe the growth target should be further reduced to 1.7%, due to the deteriorating security situation and economic climate brought about by the 11 September attacks.
The government deficit, excluding credit, will be increased to 3% of GDP, instead of the original target of 2.4%, or NIS 15 billion.
Senior economic officials are concerned that there will still be a serious deviation of NIS 3-4 billion from the new budget deficit target, despite the cuts, due to the NIS 9 billion shortfall in income tax and VAT revenues, compared with the original forecast. A senior economic official in Jerusalem claims the fall in tax revenues from all sources will amount to NIS 14 billion next year, causing the real 2002 budget deficit to reach 4% of GDP.
Governor of the Bank of Israel David Klein was summoned to last night's Sharon-Shalom meeting, where he was notified about the raising of the budget deficit target. Sharon and Shalom demanded that Klein immediately lower the interest rate. The Ministry of Finance wants a nominal interest rate of only 4%, compared with today's 5.8%. Klein was unequivocally told that he must adjust monetary policy to the government's growth and employment targets. It is believed that Klein will refuse to accede to their demand, in light of the decision to raise the budget deficit, which will push up inflation. Klein will probably continue his policy of the past two years of gradually cutting the interest rate.
Published by Israel's Business Arena on 11 December 2001