Israel Needs to Cut Over $8 Billion From 2020 Budget

Finance Ministry details reasons for deficit: Jerusalem’s socioeconomic decline, Holocaust survivor benefits and special education

Hagai Amit
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The Ministry of Finance
The Ministry of FinanceCredit: Emil Salman
Hagai Amit

The decline in Jerusalem’s socioeconomic status contributed to increasing expenditures, which caused Israel’s state budget to significantly miss its deficit target, Finance Ministry officials revealed at a Finance Committee meeting at the Knesset on Monday.

Israel is expected to finish 2019 with a budget deficit worth 3.7% of GDP, well above the target of 2.9%, the officials told legislators. As a result, the state should cut its 2020 budget by 30 billion shekels ($8.6 billion), said Shaul Meridor, the head of the budget division.

Other factors Meridor presented in the hearing included an increase in payments to widows and widowers who are Holocaust survivors or forced labor victims of the Nazis and rising special education costs.

The subsidies parents receive to send their children to after-school programs depends on the socioeconomic status of the city they live in, as determined by the Central Bureau of Statistics. According to a report covering 2015 published in November 2018 by the CBS, Jerusalem fell from the bottom 30% to the bottom 20%, which caused the after-school subsidies to shoot up. Jerusalem’s decline defied government efforts to shore up the capital, in which two socioeconomically weak communities – the ultra-Orthodox and Arabs – live.

Regarding Holocaust survivors, the state decided three years ago to increase payments to widows and widowers and relax qualification criteria to include immigrants from countries like Iraq, Algeria and Morocco, who suffered under Nazi occupation. The payments ended up being much higher than the government had planned for, adding to the deficit.

Additionally, Meridor explained that special education costs rose substantially, and noted that the unexpected extra Knesset election in 2019 ate up another 700-800 million shekels, with indirect costs of 2.5 billion shekels to the economy.

Meridor also discussed what he called the Israel Tax Authority’s “dividend operation” in 2017, which led to residents paying taxes worth tens of billions of shekels in advance. “Some of the Tax Authority’s revenues from this operation were coming from the future, and we see this year a decline in state revenues,” he said. Tax Authority officials have estimated that the operation resulted in a reduction of one billion shekels for the state.

The budget head added that some treasury plans never came to fruition, such as an increased excise tax on solvents, which was supposed to raise 500 million shekels in revenue, and the projected 300 million shekel sale of the Dorad Power Station.

Lawmaker Orit Farkash-Hacohen of Kahol Lavan, who worked for eight months to make the hearing happen, tried to get an explanation from Meridor regarding the fluctuations in treasury reports on the budget. She presented a graph of the deficit from the end of 2018, which showed that the jump started in September 2018 but projections stayed precisely within the upper target of 2.9% through December 2019. Then the deficit jumped again in early 2019 beyond the target level. Farkash-Hacohen wanted to know if there was any connection to the election campaign and the coalition’s desire to show that it would succeed in finishing 2019 within the deficit target range.

“We see that the data fit you exactly during the election, and afterward declined. What is the meaning of meeting the 2.9% target during the election?” she asked.

Meridor replied: “The state comptroller is looking into the matter. There was a draft report. I won’t say what will or won’t be in it. All my answers won’t be fair. I rely on Eran Yakov, the Tax Authority director, and Accountant General Rony Hizkiyahu personally, and do not intend to comment on the comptroller’s report.”