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The battle over the increase in next year's budget has ended - for now - in a victory for the Finance Ministry: Prime Minister Ehud Olmert has agreed that the 2009 budget will increase by only 1.7% compared to 2008. In his decision, Olmert chose the treasury's stance over that of his own National Economic Council, headed by Prof. Manuel Trajtenberg. The council had recommended adopting a new formula for setting the state's spending target, which would lead to a 2.2% rise in government spending next year.

Under Trajtenberg's proposal, government spending would rise by 2.2% a year through 2011, while in 2012, the budget would rise by 2.4%. But the treasury insisted that the 2009 budget grow by only 1.7%, due to fear of the effects of the global economic crisis on Israel. Nevertheless, the treasury proposed that the rate of growth in government spending not be fixed at 1.7% annually, but rather increase as Israel's ratio of national debt to gross domestic product falls. The Finance Ministry recommended increasing expenditure by at least 2.5% a year once the debt-to-GDP ratio drops below a predetermined level.

The disagreement between the Prime Minister's Office and the treasury has turned into an ideological debate in recent months. The main question is how to determine the appropriate growth in government spending.

The International Monetary Fund's report of a few months ago recommended that Israel change its policy for determining budgetary priorities. Instead of the current method, which involves setting targets for the increase in government spending, it said, Israel's primary goal should be reducing the national debt-to-GDP ratio. The spending target would then be derived from the debt reduction target.

The National Economic Council presented a new formula for setting spending targets based on the IMF's recommendations. The council proposed setting the spending increase in the neighborhood of Israel's annual economic growth. The precise figure would be an average of expected GDP growth in the upcoming fiscal year, estimated growth in the current year and average growth over the previous decade. This figure would then be used to compute the target for reducing the debt-to-GDP ratio.

But the treasury objected to the council's proposal. One reason was its claim that a target based on growth averages would create a cyclical system, whereby spending would increase in good years, but decline in bad times. Such a policy would keep spending down in times of recession, rather than increasing spending to stimulate the economy.

Instead, the Finance Ministry proposed a formula allowing spending to rise in relation to the decrease in the debt ratio. Today, Israel's debt-to-GDP ratio is around 80%, and the National Economic Council has recommended reducing it to 54% by 2019.

But in any case, the treasury objected to implementing the new framework in 2009, due to the global economic crisis. It was more worried about the psychological effect of increased spending than the small increase in actual spending. Specifically, it worried that it would seem as if fiscal discipline had been abandoned.

Budget behind schedule

Moti Bassok adds:

Yet another meeting on the 2009 budget between Olmert, Finance Minister Roni Bar-On and their aides ended with no real results yesterday.

Treasury budgets director Ram Belinkov and Ra'anan Dinur, director general of the Prime Minister's Office, will meet next week to attempt to find solutions to two major bones of contention: the cuts in the 2009 budget, and the items to be included in the Economic Arrangements Bill.

The treasury claims it is necessary to trim NIS 8.5 billion from the 2009 budget, while the Prime Minister's Office feels the amount needed is much smaller, and it might even be possible to get by without any cuts.