PM Benjamin Netanyahu
PM Benjamin Netanyahu Photo by Gil Cohen-Magen
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Moti Milrod
Last weekend, the social protests against cost of living reignited in Tel Aviv. In light of the protests, Netanyahu chose to raise the 2013 budget deficit rather than taxes. Photo by Moti Milrod
Olivier Fitoussi / BauBau
Bank of Israel Governor Stanley Fischer. Photo by Olivier Fitoussi / BauBau

In a surprise move, Prime Minister Benjamin Netanyahu decided on Tuesday to raise the budget deficit target for 2013, the aim being to avoid tax increases. The Prime Minister's Bureau said the deficit will grow to three percent of the gross domestic product next year, which is NIS 15 billion more than originally planned. But Netanyahu's office refused to say how the change would affect taxes, or whether the Value Added Tax would be increased or not.

If more tax revenues are required, even after adding the NIS 15 billion to the deficit next year, Netanyahu said he himself would decide which ones are raised. The issue of raising VAT from the current 16 percent to 17 percent has not been raised at meetings with the prime minister on the 2013 budget, and Netanyahu has not yet expressed an opinion on this controversial matter, which directly affects every Israeli, but especially the economically hard-pressed.

Netanyahu and Finance Minister Yuval Steinitz issued a joint statement on Tuesday afternoon on the 2013 budget deficit. The two met privately Monday night and reached agreement after most of the Finance Ministry's senior officials objected to raising the deficit target.

According to the joint statement, the deficit target will fall to two percent of GDP in 2016, and to 1.5 percent only in 2019. The announcement also said Israel's ratio of government debt to GDP, which is now 74%, will fall in 2020 to 60 percent, the upper limit set by the European Union for entry into the euro bloc at the start of the next decade.

The agreement between Netanyahu and Steinitz exposed tensions and disagreements between the two and their ministries, as well as differences between Steinitz and the senior professionals in his own ministry. In addition, questions were raised about the decision-making process on major economic policy issues.

At a meeting at the Finance Ministry on Monday between Steinitz and the treasury's senior officials, heads of the budgets division insisted that the deficit target be 2.5 percent, while Steinitz favored three percent. Instead of a larger deficit, the budgets division proposed deep spending cuts including a postponement of the introduction of free preschool from age three, which was one of the main recommendations of the Trajtenberg committee on socioeconomic change that was appointed after last summer's protest movement. But Netanyahu said there was no chance he would go back on his promise of free preschool education.

Netanyahu and his staff had been scheduled to meet Monday evening with treasury officials and Bank of Israel Governor Stanley Fischer to decide the size of the deficit, but the Prime Minister's Office canceled the meeting at the last minute. Netanyahu's office said he had a very busy schedule.

Only two meetings have been held so far between Netanyahu's staff and Finance Ministry officials on the 2013 budget. Fischer did not attend either one, and it is widely believed that he objects to raising the deficit target. After the originally scheduled meeting was canceled, Netanyahu and Steinitz held a meeting without Steinitz telling his senior staff about it.

The official deficit target for 2012 is 3.3 percent of GDP, but most forecasts predict a figure closer to four percent. The reason is a large drop in tax revenues.

Opposition leader Shelly Yacimovich (Labor ) said: "The prime minister's decision to raise the budget target to three percent is in the right direction, but is certainly not enough. Netanyahu's intention to make deep cutbacks in the budget has not changed at all, and will lead to serious damage in health education and public security," she said.