Likud Faces Loss of Treasury Portfolio

But prospective coalition line-up should enable 2013 budget to pass easily.

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Benjamin Netanyahu is expected to stay on as prime minister, but the sharply diminished strength of the Likud-Yisrael Beiteinu joint ticket will make it hard for him to save the job of finance minister for a member of his own party.

Even if he does manage to keep it in Likud hands, Yuval Steinitz doesn’t seem likely to continue as finance minister in the next government.

The ministry might go to Yisrael Beiteinu or to a senior-ranked member of one of the other coalition partners. Except for national unity governments, the post has always been occupied by a member of the prime minister’s party due to its sensitivity and central importance for nearly all government activity.

Should Netanyahu insist on keeping it within the party, particularly with the NIS 15 billion that needs to be cut from the budget, he’ll have to relinquish other important cabinet posts to his coalition partners.

If Likud-Yisrael Beiteinu forms a government with Yesh Atid, Habayit Hayehudi and the ultra-Orthodox parties, Yesh Atid and Habayit Hayehudi could expect two of the three senior portfolios - defense, finance and foreign affairs - with the third left for Avigdor Lieberman’s Yisrael Beiteinu.

Yesh Atid leader Yair Lapid is considered unlikely to want the finance portfolio, seeing the post as a potential “political graveyard.” Should the treasury stay within Likud after all, the most likely candidates for the job would be Gideon Sa’ar and Gilad Erdan, the front-runners in the Likud primaries.

Minor role for Steinitz

As for Steinitz, it is likely he’ll need to settle for a minor ministerial role or chairmanship of an important Knesset committee - in all likelihood the Finance Committee, assuming that the chairmanship of the Foreign Affairs and Defense Committee is reserved for Lieberman until his legal problems are settled. Meanwhile, the coalition talks Netanyahu is expected to conduct with potential partners will turn into negotiations over the biennial budget for 2013 and 2014, and over the Economics Arrangements Law. The new government is expected to submit the bills to the Knesset at the end of March, aiming for their approval in second and third readings in May.

A coalition comprised of Likud-Yisrael Beiteinu, Yesh Atid, Habayit Hayehudi and the ultra-Orthodox parties will ease the way for the prime minister and finance minister to pass the 2013-2014 budget cuts in the government and incoming Knesset.

Netanyahu, Lapid and Habayit Hayehudi leader Naftali Bennett see basically eye-to-eye on economic and social issues, preferring market forces to government intervention and a leaner public sector with a stronger business sector. This should be enough to force Shas and United Torah Judaism into seriously moderating their socioeconomic positions.

The government will need to bridge a NIS 15 billion to NIS 20 billion shortfall, which will likely entail up to NIS 15 billion in spending cuts and another NIS 5 billion in additional tax hikes. But the presence of Yesh Atid and Habayit Hayehudi in the coalition will ensure that the prime minister and treasury don’t try to change the rules, such as by raising the spending ceiling or increasing the deficit target, to avoid necessary cutbacks.

Indeed, that is the view of the financial markets. Although shares on the Tel Aviv Stock Exchange ended lower yesterday - a day after rallying on news of the elections - prices of government bonds extended their gains. Unlinked shekel bonds due in 2022 rose 0.22%, cutting their yield to 3.72%, which was near a record low. Inflation-linked bonds due in 2022 advanced 0.17% and were yielding 1.35% by close.

In the foreign currency market, the dollar continued to weaken, yesterday losing nearly 0.1% to the shekel to reach a Bank of Israel rate of NIS 3.7190. The euro was also weaker, losing 0.15% of its value to NIS 4.9571.

Fitch Ratings expressed optimism about budget talks, maintaining Israel’s current credit rating with a stable outlook. It forecast further small reductions in the ratio of general government debt to GDP to 73.6% this year and 72.7% in 2014.

“Coalition negotiations that will involve more detailed discussions of budgetary issues than during the election campaign (despite its strong focus on economic and social policy alongside security) are now set to begin and are likely to be time consuming,” Fitch said in a report released Wednesday. “This process may prolong the uncertainty around the 2013 budget, but most of the major political parties advocate fiscal consolidation.”

But not everyone was sharing in the optimism.

“A fear exists in the capital market about the difficulty there will be forming a stable government,” Zvi Stepak, chairman of Meitav Investment House, told a conference yesterday. “A narrow government isn’t good for the markets because it will be difficult to pass a budget that demands raising taxes and cuts in spending in order to tackle the deficit.”

The Finance Ministry is expected to recommend that the new government prioritize budgetary spending in the following order: 1) education, 2) employment and 3) infrastructure, with the goal of increased growth and reducing social gaps.

The working papers of the treasury’s budget department, to be presented shortly to the prime minister, will recommend a list of cutbacks to budget expenses alongside a list of proposals for raising taxes. The next government will decide which recommendations to adopt.

In any case the 2013 budget will be the largest yet: NIS 388 billion to NIS 392 billion. The only known target in the biennial 2013-2014 budget is the deficit ceiling: 3% of the national product in 2013 and 2.75% in 2014.

Education Minister Gideon Sa’arCredit: Olivier Fitoussi
Gilad ErdanCredit: Olivier Fitoussi
Yuval Steinitz Credit: Emil Salman
Avigdor Lieberman Credit: Nir Keidar

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