Netanyahu, Lapid Fail to Reach Accord on Budget

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Netanyahu and Lapid at the Knesset, February 2014.Credit: Emil Salman

Confounding expectations, Prime Minister Benjamin Netanyahu and Finance Minster Yair Lapid failed in a one-on-one meeting on Sunday to bring an end their dispute over the 2015 budget.

Sources said the hour-long meeting, billed as the decisive one that would end weeks of fighting over the key elements of the 2015 spending plan, got off to a good start after the two sides reached an agreement in principle over the weekend. That agreement – a compromise between the two men’s positions that called to increase the fiscal deficit to 3.4% of gross domestic product and defense spending by 6 billion shekels ($1.6 billion) – was supposed to be wound up on Sunday so that treasury budget planners could get to work on the details.

Nevertheless, Netanyahu and Lapid are not giving up, the sources said, and will try to meet again before the Rosh Hashanah holiday begins on Wednesday evening. Nevertheless, no date has been set and some expressed doubt it would take place at all. Failing that, the next time the two can meet is after Yom Kippur on October 4, as the prime minster will be in New York for the opening of the United Nations General Assembly session.

The failure of Sunday’s meeting marks another setback in a budget-making process that is now months behind schedule. The cabinet usually meets in the summer to deliberate the main outlines of the spending plan, which is ready to be presented to the Knesset in October. This year, the process has been held up by bickering between Netanyahu and Lapid, as well as by Operation Protective Edge, which preoccupied the prime minister for much of the summer.

Over the weekend, Netanyahu’s and Lapid’s top aides also agreed to not raise taxes or do away with tax exemptions. They agreed to support Lapid’s flagship plan for containing the rise in home prices by exempting many categories of homebuyers from value-added tax, although that will cost the treasury up to 3 billion shekels in tax revenue.

Lapid was apparently so confident that he had finally settled the dispute with Netanyahu that he called reporters to his home Saturday afternoon for an impromptu press conference.

In the stock market, the premature news that Netanyahu and Lapid had patched up their differences helped to raise stock and bond prices.

Alex Zabezhinsky, chief economist at Meitav Dash investment house, said the wider deficit of 3.4% wouldn’t squeeze bond prices or government finances because bond redemptions for next year will be an unusually low 69.1 billion shekels.

But at Sunday’s meeting, it appears that the prime minister was less happy with the agreement than Lapid, especially concerning the increase in the defense budget, which is much smaller than the 11 billion shekels the army is seeking. Netanyahu said he was surprised to read about it in the media.

The agreement was greeted less than enthusiastically in the Knesset, where Finance Committee Chairman Nissan Slomiansky (Habayit Hayehudi) criticized it for offering no growth drivers to lift the economy out of a worsening slowdown.

“I suggest to Netanyahu and Lapid that they shouldn’t rush to tie up budget issues without consulting us, because there’s good reason to fear they won’t pass,” he warned, citing a host of non-fiscal issues, such as civil marriage, that his party opposes.

At Sunday’s cabinet meeting, which preceded the Netanyahu-Lapid get-together, Defense Minister Moshe Ya’alon made clear the army would not be able to make do with a 6 billion-shekel increase. But he recognized that the 11 billion shekels the Defense Ministry wants would upset all the other terms Netanyahu and Lapid agreed to over the weekend.

One solution would be to widen the budget deficit to above 3.4% of GDP, but it is not at all certain that Netanyahu would agree to that.

Defense establishment sources said on Sunday that all the increased spending they are seeking for 2015 would be directed toward re-equipping the army – not on the Defense Ministry itself. They said the army’s budget in 2014 had eroded and that had to be reversed next year.

The sources said the practice that had developed in recent years of approving supplements to defense spending over the course of the year – in 2014, some 5.75 billion shekels was added to the original budget of 57.7 billion shekels – was bad for the democratic process and made planning difficult.