Israel’s Finance Chief Pledges Not to Raise Taxes for 2015

Despite Finance Minister Yair Lapid's promise, the budget draft for the following year has not yet been submitted.

Ofer Vaknin

Taxes will not be increased in 2015, Finance Minister Yair Lapid promised on Channel 2’s “Ulpan Shishi” program Friday night, presenting himself with a challenge to forge next year’s budget.

“There is no need to raise taxes next year after the tough austerity measures in the 2013-2014 budget,” Lapid said on the show he hosted before he entered politics two and a half years ago. More funding will be allotted next year for education – in part to reduce class size — as well as for health care and social-welfare services.

A year ago Lapid was under intense pressure to address a budget hole that he inherited from his predecessor, Likud’s Yuval Steinitz. Since then, however, Lapid has been striving to shape economic policy with a clear eye to public opinion. He knows that if he breaks his promise and raises taxes now, Israelis will be unlikely to forgive him at the ballot box.

But shaping next year’s budget without raising taxes will not be easy. A budget draft for the following year is usually produced by June, but not this year. And since there is no budget draft, the annual wrangling over the defense budget that follows has also yet to begin.

Last week, the Finance Ministry agreed to increase the defense budget by 1 billion shekels ($290 million), a move that followed a 2.75-billion-shekel supplement to the 2014 defense budget that was approved in October.

In both cases, officials promised that this would be the last extra allocation for the defense sector this year. The first time, the promise came from Defense Minister Moshe Ya’alon, the second time from his ministry’s director general, Dan Harel.

When Lapid ran for the Knesset at the helm of his centrist Yesh Atid party early last year, he focused on middle-class issues such as increasing the housing stock in a bid to lower housing prices.

On Friday night, Lapid said the 1-billion-shekel addition to this year’s defense budget was a good deal. In return, the army would bring forward the date for evacuating the military airport at Sde Dov in north Tel Aviv, paving the way for the construction of 16,000 housing units.

Less than two years ago, the 2015 defense budget (not including additional defense spending conditioned on income generated by the defense sector) was set at 52 billion shekels. But defense officials are seeking 5 billion shekels more, so it’s not clear where the money will come from if budgetary discipline is maintained and if taxes are not increased.

In any case, next year’s defense budget will be set by Lapid, Ya’alon and Prime Minister Benjamin Netanyahu. For his part, Lapid has said the final defense-spending sum must take the whole economy’s needs into account. He said Ya’alon’s view of the defense budget ignores the bigger picture.

Several months ago, the Bank of Israel warned that based on the targets set by the government and spending commitments made by the cabinet and the Knesset for next year, 18 billion shekels in spending would have to be paid for by tax increases or spending cuts, or both.

Finance Ministry officials say the real figure is 11 billion shekels, though even that might be reduced by bookkeeping maneuvers involving adjustments for inflation and other price changes.

On the other hand, the budget hole is constantly increasing as the government makes new long-term commitments, from increased support for Holocaust survivors to assistance to Jerusalem’s financially troubled Hadassah Medical Center. And that does not take into consideration the cost of military operations following this month’s abduction of three teenage yeshiva students in the West Bank.

Currently government spending is constrained by a cabinet decision requiring that the 2014 budget deficit not exceed 3% of gross domestic product. A more stringent 2.5% ceiling has been set for next year.

One option for Lapid would be to try to loosen the fiscal constraints and increase the permitted budget deficit. If the cabinet voted to let next year’s deficit remain at 3% of gross domestic product instead of 2.5%, that would reduce the budget cuts or increased taxes by 5.5 billion shekels.

But the international financial community does not like such bookkeeping sleights of hand, so a compromise budget-deficit figure of 2.75% of gross domestic product might be in the cards.

The Finance Ministry is now double-checking the numbers, trying to figure out which budget lines are less important and what can be cut to fund the growing set of government commitments. If necessary, Israel will be forced to cut core services as well as marginal spending items.