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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.

Saar slow to rejoice

The draft budget allocates another NIS 3.2 billion for the Education Ministry − a substantial 10% over its NIS 32.4 billion in 2010, in part due to the cut in the defense budget.

However, Education Minister Gideon Saar was not quick to celebrate. The gains may be significant, but they’re not enough to cover all the shortcomings in the education system, he told TheMarker.

“This is the beginning of a change of direction,” he said. “After a very difficult decade, which saw the budget deeply eroded from all sides, I think the Finance Ministry took a different approach, one that understands the importance of investing in education and higher education,” he said. “When you increase the education budget, it’s the public that benefits, because it receives much better civil services.” ‏(Lior Dattel‏)

Infrastructure gets 5% of requested funds

One minister upset with the budget is National Infrastructure Minister Uzi Landau, who requested NIS 450 million for the next two years and received NIS 24 billion. “The budget for the National Infrastructure Ministry is an expression of national irresponsibility,” he said. Electricity and water shortages are only going to be getting worse, he added. “The government sets goals and the Finance Ministry foils them,” he said.

The Finance Ministry rejected Landau’s response as political in nature, and said it was part of a campaign against the budget by his party, Yisrael Beiteinu. Among the things that won’t be getting funding are a NIS 63 million renewable energy plan; a NIS 42 million electricity usage efficiency plan; and NIS 25 million to fund work by an interministerial committee on earthquake readiness. (Avi Bar-Eli)

Police ‘handcuffed’ by cuts

Public Security Minister Yitzhak Aharonovitch accused the Finance Ministry of “handcuffing the police” after it rejected his demand for another NIS 1.2 billion and instead cut the ministry’s budget by NIS 400 million. The Yisrael Beiteinu minister accused the treasury of letting political considerations get in the way. “Rockets and grenades are being launched in this country, not just by external enemies,” he said. The cut will be taking policemen off the streets, he said, adding, “We’re on the way to having third-world prisons.” ‏(Moti Bassok‏)

NIS 240m for showing up

Agriculture Minister Shalom Simhon may have missed most of the marathon budget debate, but he showed up Friday in time for the vote − and that got the Agriculture Ministry another NIS 240 million. The money is earmarked for “advancing environmentally friendly and green agricultural projects.” In total, the Agriculture Ministry is receiving NIS 2.6 billion. ‏(Amiram Cohen‏)