Dissolution of Knesset liable to swell deficit

Yisrael Katz Photo; ASAP Creative Shutterstock

The Finance Ministry's attempts to nullify the effect on the fiscal deficit of the artificial rise in the average wage could be thwarted.

The declarations of Minister of Finance Israel Katz a few weeks ago about pay cuts sounded pretty bombastic: elected representatives would give a personal example, and public sector employees would lend a hand. What happened on the ground was a long way from the ambitious targets set by Katz, and now it looks as though even such progress as has been achieved in this area is liable to go to waste.

The reasons are the likelihood that Knesset elections will be brought forward, and moves by politicians to torpedo the process, including by Minister of Higher Education and of Water Resources Ze'ev Elkin, from Katz's own Likud party.

As though that were not enough, the Ministry of Finance fears that the break-up of the government will also upend the attempt to halt the rise in the official average wage, which is liable to swell the already huge fiscal deficit by billions more, and lead to unexpected pay rises for tens of thousands of civil servants and high-paid workers who have not been financially harmed by the coronavirus pandemic at all.

The surprise move of the week undoubtedly belongs to Elkin, who has apparently succeeded in burying the initiative to reduce the salaries of the highest paid workers in the public sector. What started as a proposal by Katz to reduce the salaries of members of Knesset, ministers and deputy ministers was extended in the government to all those defined as "officers", a group that includes judges and rabbinical court judges, local authority heads and their deputies, the governor of the Bank of Israel and his deputy, and the state comptroller.

On September 21, the government decided that all these people would have their salaries cut by 10% until the end of 2021. The Ministry of Finance estimated that this pay cut would save about NIS 70 million, apart from the declarative value of the move.

What happened in practice? At the beginning of this week, the ministerial legislation committee approved a bill for reducing the pay of officers, but then Elkin announced that he was opposed to the initiative and he lodged an appeal, obliging the government to review the matter. Elkin said he saw neither financial nor moral value in the proposal. "Confining the salary reduction solely to officers makes the bill of no significance, and there is no reason not to extend it to all civil servants who receive salaries higher than those of members of Knesset," Elkin wrote.

Ministry of Finance sources say that Elkin's move was designed to bury the bill, and that reducing salaries for all civil servants by legislation as he demanded was impractical both politically and legally. For his part, Elkin accuses senior Ministry of Finance officials of looking after their pay and their pockets. Of his fellow party member Katz, he said, "He is protecting the attorney general and senior people in the Finance Ministry by presenting to the Knesset a bill that is narrower in scope than what was agreed in the government… In effect, senior bureaucrats frustrated the implementation of government decisions, and acted contrary to the prime minister's directives."

Katz did not take this lying down, and told "Globes" in response, "To my surprise, after I had overcome the opposition of the minister of justice and Blue & White, which had held up the bill, I found that Minister of Water Resources Elkin submitted an appeal on various pretexts in order to delay implementation of the law. I brought this unacceptable behavior to the attention of the prime minister, and I intend to deal with the matter with the utmost severity."

Histadrut (General Federation of Labor in Israel) chairman Arnon Bar-David declared a labor dispute over the attempts to cut public sector pay by legislation, and even called Katz a bully. The stand-off between the two became worse after Bar-David held a meeting with Prime Minister Benjamin Netanyahu last week in Katz's absence, in an act seen as expressing contempt for him.

On the second and far more urgent matter as far as the Ministry of Finance is concerned, namely the average wage, Bar-David has so far displayed a responsible and helpful approach. The average wage in the Israeli economy will rise by about 12% this year, for reasons unconnected with wages as such. The rise is the result of the fact that hundreds of thousands of employees, mainly people on low wages, have lost their jobs because of the coronavirus pandemic.

The Ministry of Finance estimates that a 12% rise in the average wage will cost the public purse NIS 7-9 billion in one year, because of the linkage of many wage, taxation and welfare arrangements to the average wage. The main effects will be a rise in the minimum wage and a fall in tax receipts.

Last week, the Ministry of Finance published a bill to freeze the average wage for a year for the purposes of calculating linkage. For the time being, the Histadrut is turning a blind eye, even though the rise in the average wage could benefit tens of thousands of civil servants who, because of outdated labor agreements, are entitled to extra pay related to the minimum wage, even though they earn NIS 13,000 monthly on average.

The bill for freezing the annual wage will probably be put before the government this week, for the government to approve at its next weekly meeting. But even if the government approves it, the Ministry of Finance will be in a race against time to pass the law before the Knesset is dissolved.

Published by Globes, Israel business news - en.globes.co.il - on December 2, 2020

© Copyright of Globes Publisher Itonut (1983) Ltd. 2020

Yisrael Katz Photo; ASAP Creative Shutterstock
Yisrael Katz Photo; ASAP Creative Shutterstock
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