Kahlon Finally Unveils 2015-16 Budget, but Level of Defense Spending Still Unresolved

Finance minister calls for 2.9-percent deficit, but Bank of Israel chief says it should be lower.

Gil Cohen-Magen

Finance Minister Moshe Kahlon unveiled the draft for the 2015-16 national budget on Sunday. He still faces battles over defense spending and the budget deficit, funding demands from coalition partners and worries about the government’s slim Knesset majority.

Adding to Kahlon’s troubles is a package of reforms accompanying the 345.6 billon-shekel ($91.6 billion) spending package for 2016 that he warned would encounter strong opposition.

“This isn’t a simple process. We will encounter opposition from interest groups and other powerful people in the coming weeks,” Kahlon told a news conference. “We have no intention of surrendering, rather to implement all the policies for which we were elected.”

After a month of delays, the cabinet is due to deliberate the budget proposal on Wednesday. From there it will go to the Knesset, where the government, with its narrow, one-seat majority, will be straining to win enough votes.

The biggest conflict Kahlon faces is over defense spending. The treasury is proposing base spending of 56 billion shekels in 2016, down slightly from 57 billion shekels this year. But the final figure will be even lower – 55.3 billion shekels – if the treasury gets it way and can impose an across-the-board spending cut on all ministries of 3%.

The Defense Ministry is demanding 62 billion shekels. Complicating matters is the Locker committee report, released last month, that proposed that base spending be capped for the next five years at 59 billion shekels annually, together with a host of spending reforms the army opposes.

Another controversy is over the size of the deficit, which Kahlon said would be targeted at 2.9% of gross domestic product for 2016. To reach that level, spending this year will have to be cut by 1.4 billion shekels and by another 10.1 billion in 2016.

On that account, Kahlon boasted that he had already won a 40% reduction in the 8 billion shekels his boss, Prime Minster Benjamin Netanyahu, promised coalition partners when he recruited them to the government last spring.

But Public Security Minister Gilad Erdan is still insisting on hundreds of millions of shekels in additional appropriations for his ministry that Netanyahu promised him, while Social Affairs Minister Haim Katz is seeking an additional 3.27 billion shekels.

Kahlon pointed out that the deficit is less than the 3.4% of GDP the previous government had planned for 2015, in a budget that was never passed due to the early election. But Bank of Israel Governor Karnit Flug on Sunday proposed an even smaller deficit target.

“In our opinion the deficit next year shouldn’t exceed 2.5% of GDP, the level that will prevent the national debt from rising,” she told the weekly cabinet meeting. “If the deficit goes above the level of 2.5%, it will be understood [by the financial markets] that the government isn’t committed to fiscal discipline.”

She said there was no excuse for the deficit to exceed 2.5% at a time when the economy is running at capacity, unemployment is low and there are no extraordinary defense expenditures.

Keeping the deficit at 2.5% would leave the government with a budget gap of 15 billion shekels, of which coalition demands account for 8 billion shekels. She urged the government to consider tax increases, not just civilian spending cuts.

Flug noted that Israel’s civilian government spending was the second lowest among members of the Organization for Economic Cooperation and Development — 30.8% of GDP, compared to an average of 43%. At 31% of GDP, Israel also has one of the lowest tax burdens in the OECD, she added.

As to reforms, Finance Ministry Director General Shai Babad pointed to plans to establish a savings account for every child instead of increasing child allowance, implement parts of the 2014 anti-poverty committee recommendations, competitive measures in the food sector and tax changes to bring more homes onto the overheated real estate market

However, a much talked-about plan to introduce an inheritance tax in 2016 was put off until 2017, after the Tax Authority complained it wouldn’t have time to set up a system for collecting it.

Economy Minister Arye Dery’s proposal to exempt basic food items from the 18% value-added tax also remains a problem for Kahlon, who opposes the idea. Dery, however, has threatened to vote against the budget in the cabinet, together with his fellow Shas cabinet member, Religious Services Minister David Azoulay, if the VAT exemption isn’t included in the budget.

Officials from the finance and economy ministries are due to meet Monday to try and resolve the issue.