Cabinet Okays Contentious 2009-2010 Budget

The cabinet approved the state budget for 2009 and 2010 yesterday, advancing one of Israel's most contentious budget battles in recent years. The Prime Minister's Office had clashed with the treasury, which in turn was at loggerheads with other government ministries. Outlays for the second year are the largest in the country's history.

Twenty-six ministers voted for and four Shas party ministers were against. The budget provides for outlays of NIS 316.5 billion in 2009 and NIS 321.5 billion next year.

The budget will be submitted to the Knesset today and must be approved in three readings by July 15. The cabinet debate began on Tuesday afternoon and finished yesterday at around noon.

This time the budget debate went on longer than usual, and critics said it was poorly managed to the point of negligence at times. Many issues were decided at the last minute.

"Our approach to the economy was outdated," Prime Minister Benjamin Netanyahu told Haaretz. "The economy should be at the center of efforts by presidents and prime ministers. That is the world we live in. Today the budget is the central component in the management of the country .... Otherwise it will fall into the hands of those who ... do not make the right decisions."

The prime minister was explaining his deep involvement in the budget along with that of his top economic adviser, Uri Yogev. They put together the economic plan and reached an agreement with the Histadrut labor federation.

The Bank of Israel issued a statement last night supporting the budget. The 2009 and 2010 budget is NIS 7 billion higher than what the treasury proposed. The deficit for 2009 will be 6 percent of GDP, about NIS 42 billion, while the deficit for 2010 will be 5.5 percent of GDP, NIS 38.5 billion. This year's budget will be 3.05 percent larger than in 2008, and the 2010 budget will the same degree larger than this year's outlays.

The budget increases come despite the cabinet's recent decision to limit the increase in 2009 to 1.7 percent. From 2011, budget increases will again be limited to 1.7 percent.

The Defense Ministry will get NIS 46.5 billion this year and NIS 48.5 billion in 2010. Spending on social services will be NIS 94.8 billion in 2009 and NIS 97.8 billion in 2010, including NIS 30.9 billion for education this year and NIS 32.0 billion next year. Higher education will get NIS 6.6 billion in 2009 and NIS 6.7 billion in 2010. The Health Ministry will receive NIS 16.4 billion this year and NIS 18.0 billion next year.

Among the measures addressing the large deficit are tax increases of NIS 7 billion more than originally proposed and an across-the-board cut of 6.5 percent in all ministry budgets except defense. Value added tax will be increased by 1 percentage point to 16.5 percent until the end of 2010, and will also apply to fruits and vegetables, which have until now been exempt.

The ceiling on salaries subject to National Insurance Institute will be raised from NIS 38,415 a month to NIS 61,342, and the tax rate will increase on large, luxury and heavily polluting vehicles at a rate not yet set.

"We have managed to strike the necessary balance," Netanyahu told reporters. "We joined hands in an effort to reduce unemployment, encourage growth and help the weak. The budget addresses two challenges at the same time, the unprecedented global economic crisis and the security challenges of a kind the country has not had to face for many years."

However, with the passage of the budget, Finance Ministry budget director Ram Belinkov resigned due to differences of opinion. "The cuts Belinkov sought in the budget were not right to carry out," Netanyahu said. "Belinkov asked us to cut NIS 5 billion from defense. The defense minister agreed to reductions of NIS 1.5 billion. At this time, we couldn't make widespread cuts in defense."

The chairman of the Manufacturers Association, Shraga Brosh, said the two-year budget will create 135,000 jobs and will provide for economic growth of 2.4 percent in the next two years. Opposition leader Tzipi Livni (Kadima) criticized the budget, looking forward to the battle in the Knesset.

"Bibi lost his brakes," she said, using the prime minister's nickname. "But more importantly, no one is behind the wheel." Kadima has put together a team to oppose the budget. Meretz party chairman Haim Oron said that "the government is deceiving the public through parliamentary games."

With regard to the management of the budget process, Netanyahu told Haaretz that "my model had not existed before in Israel. It exists in Britain and the United States. The model provides for the prime minister to map out the economic strategy, and he has advisers who have to operate in conformity with that strategy and to carry out major reforms. They have to implement the policy set by the prime minister."

Commenting on budget director Belinkov's resignation, Netanyahu said: There doesn't have to be a situation in which the head of the budget division opposes the policy of [Finance Minister Yuval] Steinitz. If he doesn't want the policy and is always kicking and placing obstacles in the way, it can't work."