Israel’s Budget Outline Misses the Chance for Real Reform

The central bank chief has implied that the Finance Ministry has hoodwinked the cabinet.

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Netanyahu and Lapid at the Knesset, February 2014.Credit: Emil Salman

The 2015 budget, which has been approved by the cabinet and sent on to the Knesset, is basically an extension of the version from the year before. The two are very similar, apart from next year’s 6-billion-shekel ($1.6 billion) supplement for defense spending. What we’re spending this year we’ll be spending next year, more or less. It’s a bad budget, which is too bad, because it could have been a lot better.

The 2015 version, as it stands now, lacks any of the structural changes and reforms that could have boosted economic growth. It also lacks any major effort to address poverty and the social gaps that plague Israel.

As the Bank of Israel sees it, next year’s budget deficit will come in at about 40 billion shekels, or 3.6% of gross domestic product. Yet Finance Minister Yair Lapid himself cried bloody murder over a similar deficit when he was appointed early last year. Either way, he received backing for the 2015 budget from the whole cabinet except Environmental Protection Minister Amir Peretz.

In cabinet meetings on the document, every minister, and certainly Prime Minister Benjamin Netanyahu, has felt that the country’s fate rests on his or her shoulders. There is always cabinet support for increased defense spending, even if everyone knows that the military’s coffers are bursting.

On the other hand, there is no personal responsibility; ministers’ budget votes often contradict their personal beliefs. Particularly troubling is the conduct of three senior ministers: Netanyahu, Strategic Affairs Minister Yuval Steinitz and Energy and Water Resources Minister Silvan Shalom. All three are former finance ministers and they knew exactly what they were voting for. But they failed to voice any criticism.

All three are skilled media hounds, but has anyone heard them voice any concern whatsoever about the Finance Ministry’s proposed budget in recent weeks? Maybe somebody has reservations about Lapid’s plan to exempt certain first-time buyers of newly built homes from value-added tax? Or maybe somebody notices the absence of budget provisions for tackling Israel’s economic disparities?

By law, Bank of Israel Governor Karnit Flug is the government’s economic adviser. Her comments at Tuesday’s cabinet meeting on the budget were well taken. It’s just unfortunate, very unfortunate, that she put off expressing concerns about the budget until that decisive meeting; the media and the public had been waiting for weeks for her to speak out.

If she had voiced concerns two weeks ago — over the burgeoning budget deficit, for example — she would have launched a debate that could have made a difference. But she didn’t, and by Tuesday’s cabinet meeting it was too late. The ministers had already pledged their support to Netanyahu and Lapid.

Flug told the cabinet that the Bank of Israel was projecting a budget deficit of 3.6% of gross domestic product — higher than the 3.4% on which the budget draft was based. Flug described as overly optimistic the Finance Ministry’s tax-revenue forecasts for next year.

Basically, Flug was telling the ministers that the Finance Ministry had hoodwinked them. She was saying that the 2015 deficit, which had been slated at 2.5% before it was raised to 3.4%, would be about 2 billion shekels higher based on the ministry’s tax-revenue forecasts. The cabinet never heard such rhetoric from Flug’s predecessor, Stanley Fischer, who’s now at the U.S. Federal Reserve.

The budget proposal will only be presented to the Knesset in mid-November, which is a compromise on the timing. The cabinet’s approval came late and attention was diverted from the budget during the summer war against Hamas and its allies in the Gaza Strip.

There is a constitutional requirement that the Knesset receive the budget a full 60 days before the end of the year so it can thoroughly consider it and vote on it before the document takes effect on January 1. But the Finance Ministry found a legal precedent that satisfied Attorney General Yehuda Weinstein, so the budget will only be submitted to the Knesset in mid-November.

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