Budget deadline looms for Netanyahu

Flug, Netanyahu, Lapid

The prime minister must make four key choices to stand a chance of passing the 2015 budget on time.

Prime Minister Benjamin Netanyahu will have to decide in the next few days on four main macro-economic questions, or else the government will not manage to pass the 2015 budget on time. Sources involved in drafting the budget estimated today that there was still a slight chance the government would meet the demanding timetable for passing the budget, but it will probably not now be possible to do so without trampling underfoot several principles of good administration that have become recognized in recent years in connection with the budget process, and in fact a miracle will be required for it to happen.

The Basic Law: The State Economy obliges the government to present the state budget to the Knesset "no later than 60 days before the start of the financial year", in other words, by the end of October.

The Budget Bill and the Economic Arrangements Bill that accompanies it are drafted by the Ministry of Finance Budgets Division. The process takes not less than six weeks from the moment that the budget is passed by the government. This year, it has already been agreed that the Budgets Division will work as usual during the intermediate days of the Sukkot holiday, but the government still needs to approve the budget by the end of next week at the latest if it is to meet the deadline for submitting it to the Knesset. The cabinet session for approving the 2015 budget is set for September 11, which is Thursday of next week. In order for ministers to be properly prepared for the meeting, in recent years the custom has arisen of the cabinet secretary sending them the Budget Bill ten days in advance. According to this convention, the cabinet ministers should receive the budget today. This year, it won't happen. This morning, the budget framework had still not been agreed, and no follow-up meeting has even been arranged to the meeting on the matter that took place last week.

2. Even before the government session can take place and before the budget can be sent to ministers for their review, the government has to set the budget framework, chiefly the spending ceiling and the deficit limit, in accordance with the fiscal rules.

Decisions on the budget framework require decisions by the prime minister. An initial meeting on the matter that took place last week ended indecisively, after it emerged that there were material differences between the Ministry of Finance on the one hand and the Bank of Israel and the National Economic Council on the other. In the next few days, a follow-up meeting is due to take place, at which the Ministry of Finance will present to the prime minister its updated forecast for state revenues in 2015.

3. After he sees the revenues forecast, Netanyahu will have to settle the fierce disputes, first and foremost of course over the size of the defense budget for next year. Whereas the Ministry of Defense is asking for an NIS 11 billion increase in the defense budget, the Ministry of Finance is prepared to countenance a NIS 5 million increase only, and is threatening that any increase beyond that will mean a deep cut in the spending of social ministries. The alternative to such a cut can only be to raise the fiscal deficit target to 3.3-3.5%, as the Ministry of Finance proposes, but, as we know, Governor of the Bank of Israel Karnit Flug and National Economic Council chairman Eugene Kandel oppose such a step.

The decisions that Netanyahu makes on the defense budget and the deficit will have a considerable effect on two other decisions he has to make, on raising taxes and the spending ceiling. The Minister of Finance has already declared that a tax hike represents a line that cannot be crossed from his point of view, which to a large extent creates a balance of threat versus the position of Flug and Kandel on the deficit.

What makes the whole matter even more complicated is of course Lapid's zero VAT initiative for first time homebuyers and the additional expenditure arising from the recommendations of the German committee on health and the Alaluf committee on poverty. All these proposals increase the pressure to raise the ceiling on the rise in budget spending by more than 2.6%. Ironically enough, it was actually the Ministry of Finance that until recently argued that this was too high a percentage.

4. These four decision that Netanyahu has to make will inevitably entail painful concessions from some of the players, if not all of them. After Lapid, Flug, and perhaps Defense Minister Ya'alon, are compelled to swallow their bitter medicine, the budget will be distributed to ministers, who, as mentioned, will receive far less time to peruse it in comparison with previous years.

The ministers will presumably be unhappy, and the result is liable to be failure to pass the budget at the government meeting on September 11. If that happens, it will almost certainly mean failure to meet the timetable for passing the budget in the Knesset. And what happens if the budget is not passed by December 31 as the law requires? In that case, the government will have an extension to March 31 to pass the budget, and meanwhile will be entitled to spend one twelfth of the 2014 budget each month. This is not a good situation from the point of view of the uncertainty it will create in the economy and the effect on Israel's credibility on international capital markets. If the budget is not passed by March 31 and the law is not amended, the Knesset is dissolved and elections take place.

5. None of the coalition partners has any interest in elections at this time, and so it is believed that if the budget is submitted, it will also pass. The parties may try to extract concessions and improve their positions, but in the end they all have the will to live, and so will vote for the budget.

The question that worries Lapid's people is whether, from a political point of view, it is worth him passing the budget. His Yesh Atid party is sinking in the polls and losing seats by the month. A budget containing spending cuts such as can be expected to pass is liable to alienate what little electorate he has left. Very soon, he will have to decide whether to give up on the zero VAT bill and lose his credibility, or raise taxes and break all his promises. Either choice is liable to mean electoral meltdown. But Lapid knows that if he topples the government and leads the country to an election without succeeding in fulfilling any of his promises to the voter, he will be accused of dragging the country to the polls, and people will not forget that when they come to the ballot box.

Lapid might prefer not to pass the budget, and to spend a year or two in opposition. For the time being, however, there appears to be no-one who will take his place in the government. The haredim might like to swap places with him, but Minister of Foreign Affairs Avigdor Liberman opposes bringing them into government, and the Labor Party is not even considering joining. So if Lapid leaves it will mean an election, after which there might not be many Yesh Atid MKs who will see the Knesset again from the inside. Netanyahu's people are looking on from the sidelines and enjoying what they see. They know that Lapid cannot afford an election, and all they have to do is to count the number of seats he is losing in the opinion polls.

Published by Globes [online], Israel business news - www.globes-online.com - on September 1, 2014

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

Flug, Netanyahu, Lapid
Flug, Netanyahu, Lapid
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