Lapid Plans to Exceed Budget Cap by NIS 6.5 Billion, Forgo Major Planned Cuts

Plan puts new finance minister on collision course with Bank of Israel governor Stanley Fischer who urged Lapid to practice budget discipline.

Finance Minister Yair Lapid is drafting a budget that is NIS 6.5 billion larger than the maximum limit set by law, according to reports late last night. This means that the budget deficit will be a full 4.9 percent of GDP − well beyond the current 3 percent, and putting him on a collision course with Bank of Israel Governor Stanley Fischer.

If Lapid’s budget plan is approved, this means the government could forgo half of the planned cut for 2013 and 2014, which was supposed to total NIS 13 billion.

The cabinet is likely to approve this plan at its weekly meeting on Sunday. In order to go through, it needs to be passed into law by the Knesset. The plan also calls for capping the 2014 deficit at 3 percent of GDP.

The move has been coordinated with Prime Minister Benjamin Netanyahu, who supports it. The attorney general expedited approval for the plan.

In its preamble, the plan states that government expenditures are larger than expected and notes that the deficit for 2012 was 4.2% of GDP, instead of the 2% the government had intended. This is 2.2% beyond what was initially planned, or NIS 20 billion. Lapid’s proposal also includes spending totaling 2.2% beyond a 3% deficit, it notes. It also cites the delay in approving the budget for 2013 as reasons justifying such a high deficit target.

The plan is unlikely to have fans at the Bank of Israel, where central bank governor Stanley Fischer has repeatedly urged the new finance minister to practice budget discipline. As recently as two weeks ago, Fischer shot down an attempt by Lapid to increase the deficit target for 2013-2014 to 3.5% of GDP, or at the very least 3.25%.

Fischer has repeatedly rejected out of hand any attempts to negotiate the deficit target, stating that it should be no more than 3%. Central bank officials have acknowledged that in practice the deficit is likely to be closer to 4%.

Lapid had sought to raise the deficit limit to as much as 4.25% of GDP. The government has found itself in tight financial straits. Following Fischer’s demand for budget discipline, Lapid announced a drastic plan that included NIS 26 billion in budget cuts for 2013 and 2014. That plan had included NIS 5
billion in tax hikes, setting a modest goal of NIS 231 billion for tax revenues.

Since that plan was announced, there has been much talk about where the ax would fall. Sources have said that planned cuts to the education budget would drive a wedge between Lapid and his partymate, Education Minister Shay Piron. Another likely place for cuts is public sector salaries. The Histadrut Labor Federation has been rattling its sabers, threatening to strike if the treasury does not include it in budget discussions. 

Michal Fattal