Early elections will wreak fiscal havoc
Netanyahu allegedly postponed deliberations over the 2013 budget, which should have begun in the last few weeks, over suspicions that Kadima would leave the coalition, and early elections were on their way.
Many of those in the know at the Finance Ministry have suspected for some time that Prime Minister Benjamin Netanyahu knew that Kadima would be leaving the coalition and that early elections were on the way.
Because of that, they say, Netanyahu postponed the start of deliberations between his office and the treasury over the 2013 budget, which should have begun in the last few weeks. No prime minister can afford to go into elections saddled with a budget of spending cuts and tax hikes, as the 2013 spending package will inevitably have.
Kadima is gone and punters are saying elections will probably be next February. That means the Knesset will not vote on a 2013 budget until sometime after election day. Until then, government spending will just be a continuation of the 2012 budget, as the law requires, with the treasury allocating 1/12th of this year's budget each month. That could last through the first half of next year, or even longer.
This leaves Netanyahu in a rather uncomfortable situation. Between a slowing economy, controversy over drafting the ultra-Orthodox and the social justice protests, his situation looks worse than it did two months ago, when he canceled early elections and signed a coalition deal with Kadima.
The prime minister faces the lose-lose situation of either already raising taxes in 2012 or seeing the budget deficit swell to 4% of gross domestic product, which would threaten Israel's credit rating and raise interest rates. Next year would look even worse, with the deficit reaching 5% or even 6%.
Under the circumstances he should prefer calling elections before the end of the year to avoid doing damage to the economy by delaying passage of a 2013 budget. But with his poll standings weaker than they were two months ago, Netanyahu is unlikely to take such a risky move.
For the public, the news is half bad and half good. The 2.7% spending increase built into next year's budget won't be implemented. The Trajtenberg Committee recommendations that were approved for next year, most importantly free preschool education, won't go into effect. The salary increases agreed upon last year for doctors, nurses, government attorneys will not go into effect. Roads will not be paved and extra allocations for the army will be frozen.
The ministries themselves retain some flexibility to move funds from program to program inside their own budgets, in order to cope with the other inflexibilities of the budget. Thus, a ministry could opt to use some of the funds allocated for the second half of the year in the first half.
The good news is that the tax increase that was fated to be in the 2013 budget will not happen for now either.
Without the carrot and stick of the budget, both the finance minister and the prime minister lose much of their economic policymaking power. The task of managing the economy falls into the hands of Bank of Israel Governor Stanley Fischer. Together with the monetary policy committee, he will be the only one able to substantially affect the direction of the economy.