Israeli Cabinet Passes 2013-2014 State Budget

Defense spending to be cut by NIS 3 billion, 1 billion less than original plan; budget to be brought before the Knesset for approval.

The cabinet approved a draft of the 2013-2014 state budget on Tuesday, after marathon meetings that stretched into the early morning hours.

All government ministers with the exception of Environmental Protection Minister Amir Peretz voted in favor of the new budget. The ministers agreed to implement a flat cut to all ministry budgets, except the defense and welfare ministries, despite Finance Ministry declarations that this would not be done. The cut − 2 percent in 2013 and 3 percent in 2014 − totals NIS 1 billion.

Following an impasse between the Defense Ministry and the Finance Ministry, with the former demanding more money, and the latter determined to trim spending, the security cabinet unanimously approved Prime Minister Benjamin Netanyahu’s proposal to cut roughly NIS 3 billion from the defense budget for 2014, instead of the originally planned cut of NIS 4 billion. It is losing NIS 4.4 billion between this year and next, under the approved budget draft.

The defense budget is still the largest single budget item, at NIS 51.5 billion in 2013 and NIS 54.1 billion in 2014.

Following the cuts over the coming year, the defense budget will see significant increases between 2015 and 2018, Netanyahu promised.

The second largest budget item is the education budget, with NIS 41.8 billion in 2013 and NIS 44.1 billion in 2014.

The budget and the accompanying Economic Arrangements bill are now slated to be brought before the Knesset for approval. The Finance Ministry and the Justice Ministry are required to turn the budget into a draft bill to be presented to the Knesset no later than June 10, and the Knesset has until July 30 to pass it. The approved budget will take effect August 1.

Government ministers spent all night discussing the budget before voting at 5 A.M. on Tuesday. The approved budget proposal raises corporate tax to 26.5 percent, and not 26 percent as originally planned. The ministers also dropped the proposal to begin charging value added tax for tourists in Israel.

Israel’s budget for this year totals NIS 388.3 billion, while the budget for 2014 will pass the NIS 400 billion mark for the first time in the state’s history, at NIS 408.1 billion. In 2011 and 2012, the state budget was NIS 348.2 billion and NIS 365.9 billion, respectively.

This year’s budget will be 7 percent larger than last year’s after adjusting for inflation, and the largest in the past decade. The deficit is on target to equal 4.65 percent  of GDP, which works out to a record-breaking NIS 47 billion. The 2014 deficit is supposed to be a more moderate 3 percent of GDP, or NIS 31 billion.

On Monday night, during a meeting with Shas chairman Aryeh Deri, Education Minister Shay Piron agreed to delay the budget cuts slated for Shas’ Maayan Hahinukh Hatorani school network and United Torah Judaism’s Hinukh Atzma’i schools by a few months. The Finance Ministry had planned to hit both agencies with a 25 percent budget cut, due to the fact that they do not operate according to Education Ministry regulations, and do not participate in national or international exams.

According to a statement from Piron’s party Yesh Atid, the decision to delay the budget cuts to the ultra-Orthodox education systems will be reviewed during the next school year, after the Education Ministry creates a new public education system for the ultra-Orthodox.

After the drafts of the budget bill and the Economic Arrangements bill were approved, the Finance Ministry released a statement lauding the reforms they contain, including a plan to force all schools to teach the core curriculum, a program intended to boost employment, cuts to child stipends and rescinding them altogether for people who earn more than NIS 800,000 a year, plans designed to cut food prices in keeping with the Kedmi commission’s recommendations, and salary cuts for ministers and Knesset members.

Additional cuts include about NIS 500 million in 2013 and NIS 1 billion in 2014 in assistance to the ultra-Orthodox community, and NIS 600 million in the budget for building detention facilities for illegal migrants. The budget also includes plans to increase tax revenues by NIS 4 billion to NIS 5 billion in 2013 and by NIS 14 billion in 2014. These figures are all in comparison to the 2012 budget.

VAT is scheduled to increase to 18 percent by June 1, while all marginal income tax rates are scheduled to increase 1.5 percent as of 2014. This means the marginal tax rate will be 49.5 percent. Taxes on cigarettes and cigars increased May 7.

The budget plan also imposes health tax and National Insurance payments on housewives − a total of NIS 162 a month − for the first time in Israel’s history. This will make housewives independently insured under NII law, as opposed to receiving insurance through their husbands.

The explanatory material accompanying the budget draft contains at least one worrying statement: “Based on estimates by the Bank of Israel and the Finance Ministry, the State of Israel will have trouble meeting deficit targets over the next decade, which would have limited government debt. Therefore it will become more important to fully exploit the collection capacity of government bodies as a whole and the Tax Authority specifically.”

Bank of Israel Governor Stanley Fischer was not present at the marathon budget discussions, even though he is officially an economic adviser to the cabinet. Sources said that Fischer, who was on vacation at the French Riviera, already had one foot out the door. He is scheduled to finish his term on July 30. 

Emil Salman