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The cabinet passed the draft budget for 2011 and 2012 and the Economic Arrangements Law by a large majority on Friday afternoon, after 18 hours of debate that started Thursday evening.

Twenty ministers − from Likud, Labor and Habayit Hayehudi − voted in favor. The five Israel Beiteinu ministers objected, the four Shas ministers abstained, and one Labor minister, Isaac Herzog, was absent.

The most contentious portion of the nation’s second two-year budget involved defense − the Finance Ministry fought bitterly to decrease defense spending, while the Defense Ministry pushed for an increase.

Ultimately, the matter was put on the table of Prime Minister Benjamin Netanyahu, who decided to cut the defense budget by NIS 2.7 billion over the next two years. Defense had sought a NIS 6.76 billion increase.

Netanyahu also made a decision on another contentious matter − retirement age for non-combat career soldiers will be gradually increased to 50, up from the current 45. The move is expected to save NIS 600 million over the next two years.

The Finance Ministry had demanded the retirement age be raised to between 52 and 57, and that the defense budget be cut by NIS 4.2 billion.

Because the defense budget is not being cut by as much as the treasury had demanded, the other ministries will also be facing an across-the-board cut − 2% this year and 3% in 2011 and 2012.

While the Finance Ministry has been pushing to reduce the defense budget for years, this is the first time in years it has convinced the prime minister to go through with the move.

Defense Minister Ehud Barak had objected categorically to a budget cut, but accepted Netanyahu’s compromise, and his faction, Labor, showed nearly unanimous support for the draft budget.

Netanyahu and his finance minister, Yuval Steinitz, rejected the demands of the Shas faction. The budget calls for freezing the automatic updates for child and old-age stipends in 2011, and Shas wanted that move undone.

This matter is likely to come up for debate during the Knesset discussion on the budget.
Now that the budget and Economic Arrangements Law have been approved by the ministers, the Finance Ministry will pass them along to the Knesset by the end of October. The Knesset and Finance Committee will have until the end of the year to approve them.

The total state budget for 2011 was set at NIS 345.1 billion, and the budget for 2012 was set at NIS 358.6 billion. It was drafted based on the assumption that the economy will expand by 3.8% in 2011 and 4% in 2012 − both relatively high rates of growth for the Western world.

The maximum budget deficit for 2011 was set at 3% of GDP, or NIS 25.9 billion, and the 2012 deficit was capped at 2% of GDP, or NIS 18.3 billion.

The draft budget predicts total government revenues at NIS 232.8 billion in 2011 and NIS 248.5 billion in 2012.

“The budget we’re submitting today is responsible and balanced, and creates a level of stability for Israel and its economy for the next two years,” Netanyahu told the ministers before the vote. “The Bank of Israel governor, our friend Prof. Stanley Fischer, told me yesterday, ‘This is an excellent budget.’”

He reminded the ministers that every addition to the budget comes out of the public’s pocket.
“It may not be immediately evident when the deviation is first made, but all you need to do is to look at what’s happening in some of Europe’s leading nations. We won’t let something irresponsible like that happen in Israel,” he said.

Steinitz said after the vote, “After many years when the defense budget received significant increases, which helped strengthen the defense establishment, the government chose to give some of these additions to the budgets for education and higher education, and to advance the country’s main growth engines such as infrastructure development and high-tech industry.

“The defense budget will continue to grow over the following years at a moderate rate, in keeping with the Brodet report’s recommendations, alongside the necessary efficiency measures,” he added.