Tax-hike-shy PM Planning Budget Cuts - for 2015

The guideline would link spending to population growth rather than GDP growth.

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Worried about the specter of tax increases, three years after the Finance Ministry changed tack and put a mechanism into place to increase budget spending - it's reversing again.

Prime Minister Benjamin Netanyahu and Finance Minister Yair Lapid are leaning toward accepting a guideline that could cut 6 billion shekels ($1.7 billion) from the 2015 spending target, treasury sources say. The two are expected to make a final decision this week.

After meetings on the subject last week, sources say Netanyahu and Lapid favor returning to the rule in place from 1985 to 2010, when annual spending increases were linked to population growth.

Under that rule, civilian spending would increase 2.7% in 2015 on an inflation-adjusted basis compared with 4% under the current rule.

Another issue remaining is whether to leave the national debt target at 60% of gross domestic product or restrain spending further by lowering the debt target to 50%. The national debt is currently at 68% of GDP.

Under the current rule, spending was linked to average GDP growth over the previous 10 years. As a result, the budget was 3.35% larger in 2014 compared with 2013 and would be projected to grow 4% over each of the following two years. This far outstrips the current rate of GDP growth, which has slowed in recent years.

Government spending as a percentage of GDP is close to the average for countries in the Organization for Economic Cooperation and Development, of which Israel is a member. But in terms of civilian spending – net of interest payments on the debt – Israel finds itself second from the bottom, with only South Korea doing a worse job. This was a key reason for the social protest in the summer of 2011.

But the huge budget increases for 2012 and 2013 have forced the government to slash spending and increase taxes. According to forecasts by the OECD, the Bank of Israel, and the International Monetary Fund, the government would need to continue raising taxes in the coming years to match projected spending growth.

To prevent such a scenario, the treasury and National Economic Council in consultation with the Bank of Israel have recommended the change in the rule that Netanyahu and Lapid will deliberate on.

Another option was to continue with the method currently in place, but budget growth would be restrained by cutting back the number of years to extrapolate future growth to five years from 10. This option also calls for a debt-to-GDP ratio of 50% in order to further restrain spending.

Netanyahu and Lapid. They'll be talking a lot this week. Credit: Emil Salman

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