There’s one line in the resignation letter of Finance Ministry budget director Shaul Meridor’s that hints at the crisis that led him to announce on Sunday that he was stepping down.
“No one doubts that your job as finance minister is to lead policy, but you cannot do it while ignoring the need for regular staff work and expert input,” he wrote Finance Minister Yisrael Katz. “Certainly, you cannot do it by trampling on rules, ignoring macroeconomic data and trying to change budget forecasts to create fictitious sources of revenues you can then allocate.”
The forecasts that Meridor was talking about relate to the way fiscal policy has been conducted over the last several weeks. The coronavirus crisis involves a lot of spending, and the way that Katz and Prime Minister Benjamin Netanyahu have gone about it is to constantly add “extra-budgetary boxes” to cover the cost. It’s a problematic policy and could risk Israel’s credit rating.
In an attempt to put a lid on this phenomenon, treasury officials have been going back to earlier extra-budgetary boxes to extract a few hundred millions shekels here or a billion there that had been allocated but is not expected to be spent in its entirety. They identify that kind of money based on expectations that the public will never fully make use of some aid programs. Nevertheless, there’s a risk that the forecasts will be wrong because the lifespan for some of these programs is as much as a year.
Where Meridor and Katz argued was over part of an aid program that went into effect July 29. One of its sections offers, among other things, to subsidize businesses’ fixed costs and help them survive the coronavirus crisis. Businesses have until next June to apply for the aid, but officials try to calculate in advance how of them will actually do so.
Katz insisted that the low rate of applications for the program showed that the official forecast for the rest of the year was too high. Meridor responded that it was premature to revise the forecast just a month after the program had gone in effect. There was still 11 more months to go.
A similar argument broke out between them over a grant that is being offered to newly released soldiers and to unemployed people going back to work at lower-paying jobs than they had before. In the end, the forecast wasn’t changed, but not before the debate became angry.
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In any event, there were big numbers involved: Katz had sought to reduce the expected 20 billion shekels ($6 billion) in spending on the program by about 3 billion.
Meridor wasn’t a major party to a third disagreement, which involved a state-guaranteed loan fund for businesses hurt by the pandemic. Treasury officials had estimated a default rate for the loans and budgeted accordingly. But Prof. Avi Simhon, the head of Netanyahu’s National Economic Council, said the forecast was too high.
Simhon lost the debate, but he has been spending time at the treasury lobbying for the government to provide 100 per cent guarantees for the loans – a rate that would borrowers little incentive to repay their debts.
Sources say Netanyahu, who has insisted on managing coronavirus policy, doesn’t trust Meridor and prefers that he not attend economic policy meetings. When he does, Netanyahu doesn’t give him a chance to speak. That attitude has apparently been adopted by Katz and other ministers.
Meridor isn’t only an innocent victim in the affair. Sources say that the budget division didn’t adjust its normally tight-fisted policies even after it became evident that the coronavirus was creating an unprecedented economic crisis. That, in turn, angered Netanyahu, who was feeling the pressure last spring from protests by the self-employed and the threat he perceived to his remaining in power.
Treasury sources pointed to a meeting on Sunday to discuss plans to set up an employment headquarters at the ministry to show how difficult the situation had become. While Katz was presenting the plan, Meridor was using his iPad. Avi Messing the treasury’s legal adviser, spent an hour talking about the legal limits to the undertaking, which prompted Katz to explode, accusing Messing of being Meridor’s mouthpiece.
A spokesman for Katz termed the accusations against him “a blatant lie.” He said the minister had asked the budget division and other ministry officials to review the spending forecasts for aid programs, and that the budget division’s stand that there was no justification for changing them was accepted, even by Netanyahu. As a result, the money for additional help for people qualifying for the negative income tax was funded by a new extra-budgetary box.