Lapid Looks Ready to Fold in Budget Poker With PM

Netanyahu has the better political cards, leaving his rival little but to lose gracefully

Former Finance Minister Yair Lapid and Prime Minister Benjamin Netanyahu.
Oren Nachshon

The war between Prime Minister Benjamin Netanyahu and Finance Minister Yair Lapid appears to be nearing a conclusion after reaching new heights this week.

Economically speaking, the differences between the two over the 2015 state budget are not that big. This is above all a political battle, and to a large extent a war of egos.

Netanyahu and Lapid, as well as their respective aides, have recently signaled that they are not interested in letting their disagreement lead to the collapse of the government. But the contest has taken on the characteristics of a poker game.

It has become evident that Netanyahu has the better hand and Lapid will be the one who folds. It will be up to the prime minister to decide whether to let the finance minister retain a measure of dignity as he does so.

At the Sunday meeting of Netanyahu, Lapid and Bank of Israel Governor Karnit Flug, together with their teams of advisers, Finance Ministry officials proposed a budget deficit equal to 3.2% of gross domestic product. That’s more than the 3% that both Netanyahu and Flug have mentioned, but the two didn’t offer a word of criticism.

In any event, spending was supposed to increase next year by 8 billion shekels ($2.2 billion) from 2014. With that extra 0.2 percentage points, the treasury will have another 8 billion shekels available to spend.

In addition, the cabinet had already agreed to cut 2 billion shekels from civilian spending and turn most of the savings over to the army. Increasing the tax on coal will put another 1.4 billion shekels in the treasury’s coffers, so that there will be all told some 19.4 billion shekels extra available to spend in 2015.

Against that, the Bank of Israel estimates the budget deficit will be a whopping 18 billion shekels next year, although the treasury more conservatively puts it at no more than 12 billion shekels. The defense establishment is seeking an extra 11 billion shekels for 2015, although it will probably settle for between 8 billion shekels and 9 billion shekels.

That 19.4 billion shekels goes a long way to filling the budget hole of some 27 billion shekels the central bank sees and nearly fill ups the 21 billion shekels the treasury figures it is.

The prime minster on Monday directed Yariv Levin, the Knesset speaker and a close ally, to freeze deliberations over Lapid’s plan to exempt most purchases of new homes from the value-added tax — the finance minister’s flagship initiative to lower housing prices. The message Levin gave Lapid’s Yesh Atid party was that the bill would be revived only when its chief boss agreed to increasing the defense budget for next year.

Zero-VAT will cost the treasury a hefty 3 billion shekels a year. Abandoning the proposal, which is almost universally opposed by economists, would go a long way toward solving Israel’s fiscal problems, but for political reasons Netanyahu has allowed the initiative to move ahead.

What has changed is that after several days of consultations with Habayit Hayehudi and the ultra-Orthodox parties, the prime minster has decided that he could remain in power in the event that Lapid takes Yesh Atid out of the coalition over the issue. Yesh Atid’s popularity ratings are in chronic decline, which only bolsters Netanyahu’s assessment.

The Lapid camp is confused. No one understands why Lapid has stuck to his guns on zero-VAT, repeatedly insisting he won’t raise taxes, opposing any budget cuts and ruling out the closing of tax loopholes. He has put himself into such a difficult position that his only option is to figure out how he can blink first without appearing to do so.

Lapid could take his party into the opposition, but he fears that in that event Yesh Atid would not be able to repeat its performance in the next election and would lose Knesset seats.

How can the treasury meet the army’s demands, which also include an additional 8 billion to 10 billion shekels money over the next two to five years?

One way is to lower the stated cost of Operation Protective Edge, which the Finance Ministry says is really 6.5 billion shekels, not 9 billion shekels as the army claims. In any case, the army doesn’t have to be reimbursed for every last shekel it spent on the war, the treasury argues. Treasury officials say the Defense Ministry won’t get more than 5 billion shekels for the fighting in Gaza.

But that still leaves that 11-billion-shekel increase the army wants for 2015. There’s a sense in Jerusalem that the two sides will settle for something between 8 billion shekels and 9 billion shekels.