The revised state budget for 2024 passed by the Knesset last week, after a delay of nearly a month, set off sighs of relief in the Ministry of Finance, following four months of work on adjusting the budget following the outbreak of war, but the celebration was muted. Political battles led to many of the important issues being deferred, and they will probably have to wait until the 2025 budget.
The fight between the Ministry of Finance and Knesset Finance Committee chairperson Moshe Gafni ended in a draw. Each side managed to take significant slices out of the other side’s plans, and neither side ended up satisfied.
Gafni is angry that NIS 500 million of coalition party spending has yet to be legally approved. The money is intended for salary rises at education institutions associated with the haredi parties. In protest, for every shekel of his that was blocked, Gafni blocked NIS 11 for the Ministry of Finance.
Gafni channeled his many years of experience on the Finance Committee to parliamentary ploys that succeeded in hitting the Ministry of Finance where it hurts, but without incurring the blame that would have been his lot had he thwarted the entire budget. The emergency war budget was prepared without the Economic Arrangements Bill that usually accompanies the budget and is the vehicle for reforms designed to encourage economic growth, and to increase state revenue and reduce expenditure. Instead of an Economic Arrangements Bill, the Ministry of Finance Budgets Division worked on a multi-year convergence plan for 2024-2027 designed to bring revenues and expenditure more into line and put Israel back on the track of a declining debt:GDP ratio.
Gafni blew holes in this plan, which was presented to foreign investors and to the international credit rating agencies as a guarantee of responsible fiscal conduct by the Israeli government. He avoided putting to the vote in the Finance Committee adjustments amounting to NIS 6.6 billion to state revenues, meant to offset the costs of the war, and representing about a third of the Ministry of Finance’s plan. Gafni knew exactly how far he could go in poking his finger in the Ministry of Finance’s eye without causing the budget to fall and without undermining the stability of the coalition.
Gafni let the item that was most import to the Ministry of Finance, the rise in the rate of VAT to 18% in 2025, pass the committee, and in the 2024 budget itself he blocked "only" NIS 400 million. The Finance Committee chairperson can pretend innocence and argue that there is yet time to discuss all the matters left open, such as taxation of rents and purchase tax on homes, a carbon tax, and other Ministry of Finance plans that were left out of the budget.
What most disturbs foreign investors, however, is the uncertainty over how Israel will cope with the growth in permanent defense spending in the coming years. When Moody’s downgraded Israel’s rating last month, it mentioned the Ministry of Finance’s convergence plan approvingly, but also expressed the reservation that in Israel’s political reality not all plans for future years are actually fulfilled. Now, when the fear of lack of economic seriousness has partly materialized, the chances of Israel escaping a rating downgrade from rival rating agency Fitch in the coming days are liable to diminish.
Published by Globes, Israel business news - en.globes.co.il - on March 17, 2024.
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