Defense Ministry Faces NIS 4.5 Billion Cut in Planned 2013-14 Budget

The ultimate proposed budget, which cannot be approved until the new Knesset is seated and a new government is in place, will be a two-year budget, covering 2013 and 2014.

The Finance Ministry’s budget division is preparing a plan that would cut NIS 10 billion from expenditures in the 2013 budget and NIS 20 billion in the 2014 budget, with the Defense Ministry facing a NIS 4.5 billion cut over the two years.

The division will today begin in-depth deliberations on the proposal, which are expected to last through the week. The ultimate proposed budget, which cannot be approved until the new Knesset is seated and a new government is in place, will be a two-year budget, covering 2013 and 2014.

The budget is expected to be approved by the new government around the end of June. Officials say even after the cuts, the resulting budget would be pro-growth and geared to narrowing socioeconomic disparities.

The treasury does not plan to raise tax rates but does intend to eliminate tax exemptions and distortions in the tax code.

Because the year will be about half over if and when the budget is approved, in practice a two-year budget would only be in effect for a year and a half. The ministry staff will be building a budget for 2014 and then extrapolating what spending this year should look like.

The 2014 spending cuts will be in five major areas: the defense budget, child allowances, government salary outlays, infrastructure spending, and more targeted cuts in specific budget lines that are viewed as unnecessary or bloated.

Unlike past practices, across-the-board cuts in all government ministries is not planned. Such an approach may be simple, but it can be argued that it ignores specific spending priorities.

With regard to the defense budget, there is a consensus at the Finance Ministry that defense spending should be curbed after substantial increases in recent years. The staff will recommend that annual defense spending for 2013 and 2014 be identical to the original 2012 defense budget of NIS 50.5 billion net (or NIS 56 billion including conditional sources of revenue).

In practice, this means the defense establishment would be getting NIS 3 billion less in 2014 than it received in 2012; over the two years 2013 and 2014, it would amount to NIS 4.5 billion in cuts.

However, treasury officials would be pleased if the final budget had even greater defense cuts, which would encourage streamlining.

The Finance Ministry also plans to call for about NIS 2.5 billion to NIS 3 billion in child allowance cuts next year, and half that this year. In 2012, the government spent about NIS 7.5 billion on child allowance payments.

The proposed cuts in government salary spending follows a major increase in the government payroll in recent years. In practice, though, treasury officials said what is being considered is not a cut but rather a halt in the growth of the state payroll, or the rescission of promised wage increases. This would save an estimated NIS 4 billion to NIS 5 billion in total this year and next.

When it comes to infrastructure projects, thought is being given to converting government-funded projects to projects built by the private sector on a build- operate-transfer basis (or BOT, as it is known). This involves inviting bids for construction projects and letting the successful bidder operate the project and derive the income from it for a period of years before turning it over to the state.

Alternatively, projects might be built via a joint public-private initiative. The hope is that NIS 2 billion could be saved over the course of 2013 and 2014 without major curtailments in projects, as such projects also promote economic growth.

This would still leave another NIS 7 billion to NIS 9 billion in more targeted cuts to individual budget lines.

Finance Ministry sources said yesterday the budget deficit is the first budget item the new government will need to deal with, and the ministry staff is planning not only to submit its proposal but also to give the government some alternatives in how the cuts would be made.

Unless a change is agreed upon this week, the Finance Ministry’s state budget plan will be based on an assumption that the economy will grow by 3.5% this year, with a deficit targeted at 3% of gross domestic product. Next year’s proposed deficit will be 2.75% of GDP.

As Prime Minister Benjamin Netanyahu begins efforts in earnest to put together a coalition government that will face the prospect of major spending cuts, one way to accomplish this would be a smaller cabinet. A reduction in the number of ministers without portfolio and ministers assigned to the Prime Minister’s Office, the merger of units in the office and the elimination of three deputy ministers’ positions would save the state NIS 100 million per year, TheMarker has found.
 

Olivier Fitoussi