Israel's Finance Minister Finally Presents His 2021 Budget as Coalition Teeters on Precipice

Nati Tucker
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Finance Minister Yisrael Katz at a press conference in Jerusalem, September 20, 2020
Finance Minister Yisrael Katz at a press conference in Jerusalem, September 20, 2020Credit: Emil Salman
Nati Tucker

Finance Minister Yisrael Katz finally presented his proposed 2021 state budget and accompanying Economic Arrangements Law on Monday.

Nevertheless it looked as if Prime Minister Benjamin Netanyahu was stubbornly holding onto his plan to delay a budget vote until March and force Israel into elections.

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The budget’s topline figure of 426 billion shekels ($128 billion) isn’t the fruit of any policy measures set by Katz. Rather it represents the amount of spending allowed to rise from one year to the next, not counting the off-budget spending to cope with the coronavirus crisis.

It sees a deficit equal to 9% of gross domestic product, lower than expected after the treasury revised its forecast for the economy and tax revenues.

Its central scenario, which was revised after an unexpectedly strong third-quarter growth and the growing likelihood that a COVID-19 vaccine will be available in the first half of 2021, sees GDP contracting 4.2 percent this year.

That’s a far smaller decline than the 5.9 percent it had previously forecast. Next year, it expects GDP to grow 4.5 percent, although Chief Economist Shira Greenberg warned that if the coronavirus pandemic grew worse, growth could fall to just 2.4 percent.

Israel’s unemployment rate, including workers put on unpaid leave, is expected to remain at an elevated 8.9 percent in 2021 in the treasury’s most optimistic scenario, and could remain as high as 12.3 percent in its most bearish one.

The Ayalon mall in the Tel Aviv suburb of Ramat Gan, November 27, 2020.Credit: Moti Milrod

The Finance Ministry’s rosier view is also based on evidence that the economy has bounced back from the second lockdown in September and October quickly, as evidenced in data on credit card purchases and gasoline consumption. The hit the economy has taken has not been across the board, but concentrated in certain sectors.

In line with the Bank of Israel’s recommendations, the government will not try to reduce its debt next year nor will it raise taxes as long as the economy remains fragile. What is less clear in the Katz budget is where exactly spending will be adjusted, for instance how big the defense budget will be and whether there will be measures to support economic growth.

The reforms contained in the Arrangements Law are mostly in line with those Katz unveiled last July. They include steps to increase banking competition and enable financial technology (fintech) firms to enter the market, lowering barriers to food imports and a transition to direct support of the farm sector.

To help upgrade Israel’s human capital and labor productivity, the law proposes a technology stream for the national service program, reducing regulations and granting more independence to the heads of education institutions.

In the five months since the original Arrangements Law was first unveiled, no major changes have been made in it, meaning the government could have approved it a long time ago had Netanyahu not wanted to hold off the budget vote until the last possible minute in March, automatically triggering an election. 

Benjamin Netanyahu and Yisrael Katz visit a food factory in Beit Shemesh, August 12, 2020.Credit: Amit Shabi

Meantime, the failure to move forward with the budget has now become a legal issue. Attorney General Avichai Mendelblit told Netanyahu, Katz and Alternate Prime Minister Benny Gantz on Monday that the government must approve the budget quickly because it is already in violation of laws setting the time-frame for presenting not just the 2020 budget but the 2021 budget as well.

Under the law, the government must submit the budget at least 60 days prior to the start of the new year in order to give lawmakers enough time to debate it. “This is all the more true as long as there are plans to include in the budget legislation proposals for structural changes and fiscal legislation, which require an additional Knesset time,” Mendelblit wrote.

In addition, the government faces a deadline to explain to the High Court of Justice why it pushed back the deadline for passing the 2020 budget to December from August.

Over the last few weeks, several compromise proposals have been made to bridge differences between Netanyahu’s Likud party and Gantz’s Kahol Lavan party over how to move ahead with the 2021 budget.

One of them is to jointly approve the budgets for both years at the same time or to approve 2020’s now and 2021’s in March. On Monday, Kahol Lavan said it was demanding the 2021 spending package be approved immediately, but it did not say whether it would support Wednesday’s vote to disperse the Knesset.

Delaying the budget together with the complicated political situation threatens to make government operations more complicated with the start of 2021. That is because in order to enable the extra funding the government needed to cope with the coronavirus, it amended the Basic Law: National Economy to create a one-time parallel budget that this year has reached 83.3 billion shekels.

In 2021, the parallel budget is supposed to reach 53 billion shekels to cover costs such as unemployment and quarantine benefits, and aid to business. But the Knesset would have to approve the amendment a second time – three votes, each winning a 61-seat majority.

That it would have to be approved even as the regular budget is being held up for political reasons may create legal difficulties, even if the opposition agrees to support it.

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