Kahlon’s Dilemma: Big Ideas, Little Money

Netanyahu’s finance minister-designate faces constraints in spending state funds to realize his ambitious agenda.

Tomer Appelbaum

One thing Prime Minister Benjamin Netanyahu and his Finance Minister-designate Moshe Kahlon certainly agree on is not making the same mistakes as Netanyahu’s last government. That starts with the prime minister taking a more hands-on approach in making economic policy than he did after giving the finance portfolio to Yesh Atid chairman Yair Lapid.

Kahlon wants to guarantee a good working relationship with the prime minster, but as an experienced politician he knows to secure promises from Netanyahu before the government is formed, not after.

Kahlon’s Kulanu party and Netanyahu’s Likud are fighting over whether the power post of Knesset Finance Committee chairman will go to Kahlon’s party or to Moshe Gafni of United Torah Judaism. But when Netanyahu and Kahlon met on Tuesday and the premier confirmed that Kahlon would indeed be the next finance minister, the atmosphere was warm and cordial.

Lapid’s advantage in the 2013 coalition talks was Yesh Atid’s 19 Knesset seats. Although Kulanu will have just 10 Knesset members, Kahlon, 55, has the advantage of being an experienced politician. He served in three Knesset terms and held two portfolios, most famously as the communications minster who broke Israel’s cellphone carrier “triopoly,” forcing down prices. Lapid, 49 when he entered the Knesset for the first time, in 2013, was a journalist and TV presenter until founding Yesh Atid the previous year.

Kahlon, who bolted from Likud to form a party that took votes from his former political home, knows Netanyahu well and the two hold many of the same views defense and foreign policy.

But Kahlon’s economic agenda may put him at odds with the prime minister. Kahlon has positioned himself as fighting for the lower middle class, people who earn around 10,000 shekels ($2,530) a month and would benefit not only from a lower cost of living but also from increased government spending on social services.

At their Tuesday meeting, Kahlon submitted to Netanyahu many of his key demands regarding the housing market. Kahlon has pledged to build 250,000 new homes, to reduce home prices and make the zoning and regulatory process more efficient.

Housing and banking

He told Netanyahu he wants control of the Planning Administration, part of the Interior Ministry, as well as the Israel Land Authority, which are key to the success of his plans to address the housing crisis.

Kahlon’s other main policy thrust is banking, where he aims to weaken the cartel and profits accrued at the expense of depositors. He wants to remove barriers to new market entrants, including Internet banks and spinning off the exiting banks’ credit card units. He wants to reduce fees and introduce deposit insurance.

Further down, though not much, on his agenda is to introduce more competition into the food, electric power and natural gas sectors. Kahlon also wants to reform the pension sector and impose an estate tax on people with assets over 10 million shekels.

But before he can address any of that, Kahlon will first have to address the budget. The 2015 spending package was left unfinished when Netanyahu called the early election in December, leaving the government to operate along the parameters of last year’s budget.

Under the law, the new government has just 100 days after it is formed to win Knesset approval.

Kahlon faces the immediate dilemma of deciding whether to pass a two-year budget that could cover the rest of 2015 and all of 2016 or give lawmakers a spending package for the rest of the year and bring them a 2016 package a few months later.

Treasury officials prefer a two-year budget, but Kahlon will probably opt for two budgets, the second of which will bear the imprint of his new policies. That budget will no doubt include stepped-up government allowances, more daycare and afternoon programs and lower fees for government services.

Kahlon’s problem will be finding the money to pay for this. On one hand, Lapid left him an economy in good shape, which is generating tax revenues 10 billion shekels in excess of what treasury planners had expected. There’s also the 2 billion shekels in revenues the government won’t be losing because Lapid’s controversial Zero-VAT plan won’t be enacted.

But Kahlon also faces severe spending constraints. For one, the ultra-Orthodox parties are demanding 2 billion shekels to 3 billion shekels in additional allocations as the price for joining the coalition, reversing the spending cuts Lapid imposed on them through lower child allowances and spending on yeshivas. The Bank of Israel estimates, in any case, that the treasury faces an 8-billion-shekel gap between projected expenses and revenues for 2016.

Most serious of all, the defense establishment is seeking a 5.6-billion-shekel supplement on its already massive budget of 64.8 billion shekels.

Cutting the defense budget would generate savings to help Kahlon with the extra spending he favors, but that won’t be easy to achieve. Treasury officials say the army cannot have the additional money — it was already given 6 billion shekels in supplements this year — but Netanyahu is likely to look favorably on the request.

Another option, since Kahlon has promised not to raise taxes, is to rescind some tax exemptions. The treasury estimates that exemptions will cost the government a whopping 50.6 billion shekels in 2015, equal to 4.5% of gross domestic product.

Trouble is that behind every exemption is economic, political or social-welfare logic, or at the very least a powerful interest group. It is hard to believe that in his first year in office Kahlon would dare risk a political battle to eliminate any of them.