Two and a half months late, assuming no further delays, the state budget for 2025 will be presented to the government for approval this Thursday. Despite the fact that little time is left, Minister of Finance Bezalel Smotrich’s package of measures meant to narrow the fiscal deficit is still full of holes.
Out of a list of spending cuts and other austerity measures amounting to NIS 40 billion that the Ministry of Finance seeks to include in the budget, only NIS 10 billion has been secured in principle. Measures amounting to the order of a further NIS 10 billion are still the subject of negotiations, while on the remaining NIS 20 billion worth of adjustments there are significant disputes that are not close to resolution at the moment.
Of the main plans that the Ministry of Finance introduced into the draft budget, the only ones that it has already secured are the freezing of the income tax brackets and tax credit points (saving NIS 2.6 billion next year) and freezing of some National Insurance payments (a saving estimated at NIS 3-4 billion).
Meanwhile, the Ministry of Finance Budgets Division is negotiating with the various government ministries on public spending cuts, to release funds that will be diverted to defense expenditure. According to Ministry of Finance sources, progress is being made with a small number of ministries: the Ministry of Health, the Ministry of Education, the Ministry of Welfare and Social Affairs, and the Ministry of the Interior. Agreement with other ministries is still a long way off. Nor is there agreement on the addition to the defense budget. The gap between the Ministry of Finance and the IDF is in the tens of billions.
Relying on the last minute
The list of things in danger of being cut, shrunk, or split off from the budget, is long. It includes, for example, reducing tax benefits on advanced training funds and pensions, freezing old-age and disability allowances, freezing the minimum wage, and imposing a new tax on companies with undistributed profits. The freezing of part of the pay rise due in the public sector is being positively discussed between the Ministry of Finance and the Histadrut (General Federation of Labor in Israel), but there is no agreement yet, and the measure involves additional demands on both sides.
Ministry of Finance sources admit that a situation in which almost everything is still open at this advanced stage of preparation of the budget is not ideal, but they express determination to insist on fiscal adjustment measures. Ministry of Finance officials returned to work after the Jewish holiday season to a pile of uncompleted tasks, and it looks as though many of them will remain uncompleted until the government’s traditional budget night.
The Ministry of Finance is relying considerably on late night negotiations in the Prime Minister’s Bureau with the coalition partners, and in side rooms between Ministry of Finance representatives and those of other ministries. The Ministry of Finance hopes that, at the last minute, it will manage to converge on the spending cuts target, and come as close as possible to the planned fiscal deficit level of 4% of GDP, as declared by Smotrich.
Even before the expected nighttime wrangling at the end of the week with government ministries over cuts to their budgets, there are matters in dispute between top Ministry of Finance officials and the prime minister’s advisers. For example, it is still not clear what will happen to two of the main fiscal adjustments planned by the Budgets Division: freezing the updates to the minimum wage and old-age pensions.
Many of the measures that the Ministry of Finance has introduced into the budget have still not been agreed with Prime Minister Benjamin Netanyahu. Ministry of Finance officials were due to meet the prime minister’s economic adviser Prof. Avi Simhon and Prime Minister’s Office director general Yossi Shelley on Sunday afternoon to formulate the package of spending cuts and austerity measures that will be introduced into the budget. The meeting was postponed at the last minute.
The meeting was arranged without the participation of Netanyahu himself. In normal times, Netanyahu would have led the discussion, to make decisions in advance of the government budget night. Because of security developments, among them the counter-attack on Iran, Netanyahu’s attention is mainly on the war, and he was not due to participate in the meeting. When it eventually takes place, Simhon and Shelley will present their recommendations to Netanyahu, who will have to decide what will go into the budget and what will not.
The two measures mentioned, on the minimum wage and state pensions, were meant to reduce the fiscal deficit for 2025 by billions of shekels, to allow for greater defense spending. They have been criticized as stealing from the weakest sections of the population.
Business does battle
One of the Ministry of Finance’s biggest challenges in reaching the NIS 40 billion target for fiscal adjustments is obtaining approval for the proposed tax on "trapped profits", that is, company profits that remain undistributed for a long period of time. This measure alone is meant to yield NIS 10 billion revenue in 2025.
At present, there are no known objections to this measure in the government. The main battle will be in the Knesset, where business organizations will try to recruit the support of Knesset members to defeat this item, or to soften it in committee. The proposal disturbs many business leaders, who will put all their weight behind efforts to overturn it.
Another matter in dispute between business and the Ministry of Finance is the proposal to allow the major cities - Tel Aviv, Jerusalem, and Haifa - to change the method of measuring buildings for the purposes of calculating arnona (local property tax). The business organizations say that this is liable to lead to a 30% jump in arnona payments by businesses and residents.
Published by Globes, Israel business news - en.globes.co.il - on October 28, 2024.
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