The bill has come due
A large deficit could well drag the country into the global crisis.
Israel is about to slash some NIS 14 billion from its 2013 budget - its largest budget cut ever. But actually, this isn't a cut: The 2013 budget will still be the largest in Israel's history, surpassing the 2012 budget by about NIS 13 billion. Thus in effect, this is only a reduction in the expected increase in the budget, not a real reduction in absolute figures.
Israel has gotten into this situation because over the last few years, the government has been generous to the citizenry. It approved massive wage increases for doctors, government attorneys and social workers. It financed two huge reforms that increased teachers' salaries and changed the face of the education system: the New Horizon and Oz Latemura plans. It invested billions to fund free education from age 3, and also to expand the availability of day care for younger children. Additional billions went toward increasing the budget for higher education, and tens of billions were allocated for infrastructure investments.
This upsurge in investment was important and necessary. But one can't invest incessantly without paying for it. That's especially true now, when the world is going through a difficult period of economic uncertainty. So in the end, the bill arrived: This generosity resulted in excessive expenditures and promises that totaled some NIS 27 billion, in a budget that was only slated to increase by NIS 13 billion. Thus it's now necessary to find a way to do without the remaining NIS 14 billion.
The government's munificence also resulted in a loss of budgetary discipline and a disregard of the worsening economic situation worldwide. When this global deterioration began affecting Israel - resulting in slower growth, and therefore in plunging tax revenues - it created a risk of an excessively large budget deficit. In the midst of a global financial crisis, increasing its budget deficit would be the most dangerous thing Israel could do: A large deficit could well drag the country into the global crisis.
The first part of the bill was submitted to the Israeli public this week, with a huge package of tax increases. The second part, NIS 14 billion in cuts, will be submitted in September. This is a difficult step, but it is nevertheless preferable to the alternative.