Finance Minister Yair Lapid has retreated from his suggestion that the country’s budget deficit be allowed to reach 4.2% of gross domestic product this year and 3.5% next year, rather the current 3% limit.
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Following a meeting Sunday with Bank of Israel Governor Stanley Fischer, who had opposed the move, Lapid announced that the target would remain at 3% this year, and would also be 3% next year. The meeting was reportedly tense.
Raising the target would have made it easier to finalize a budget for this year and next, as it would have spared Finance Ministry officials some of the tough measures they will now be forced to enact in spending cuts and tax increases.
Following the finance minister’s decision, ministry staff decided to freeze public-sector hiring, meaning that, as it stands now, new government civil-service workers will not be hired over the next year and a half, and hiring of other public-sector employees will also be suspended.
A senior ministry official said the decision to leave the deficit target at 3% will have far-reaching consequences affecting budgets for education, social welfare and health, as well as the development of infrastructure.
In June 2012, the cabinet passed a resolution at the recommendation of then Finance Minister Yuval Steinitz, and with the support of Prime Minister Benjamin Netanyahu, setting this year’s deficit target at 3% and next year’s at 2.75% of the gross domestic product. BoI Governor Fischer, along with the head of the Finance Ministry budget division and the ministry’s accountant general, took the position at the time that the target for both years should be set at 2.5%, but the cabinet overruled them.
The news that Lapid had relented on his effort to raise the target above 3% prompted a senior ministry official to say that the current circumstances leave no choice but instituting measures that will hit the middle class − including civil servants who will see their salaries and benefits decline.
The official also predicted that holders of continuing education fund accounts (“kranot hishtalmut” in Hebrew) would lose their tax-exemption despite opposition from the Histadrut labor federation.
The official also acknowledged that revenues from increased tax rates on luxury apartments, luxury cars and whirlpool baths, which Lapid announced last Thursday, would be minimal and fail to address the budget deficit problems the ministry was facing.
In his conversation with Lapid, Fischer was said to have told the freshman finance minister that any increase of the deficit target beyond 3% would affect the stability of the economy.
Fischer also rejected a compromise suggested by Lapid that the target be increased to 3.5% this year, saying that it would pose serious danger to the economy. As a result, Lapid ultimately relented.
The decision has PR implications, both domestically and overseas. It has symbolic significance in the eurozone, because the 1992 Maastricht Treaty required countries entering the eurozone to maintain budget deficits of no more than 3% under most circumstances.
It is seemingly clear to both Fischer and Lapid that, as a practical matter, Israel cannot meet the 3% deficit target this year because passage of the budget was delayed by the January 22 Knesset election and is not expected to go into effect before August.
The expectation at that point is that in annual terms the deficit will exceed 4% of GDP, and may even go as high as 4.6%. Nonetheless, the assumption is that next year the government and the central bank will make every effort to maintain the deficit within the 3% target.
Lapid expressed his intention to raise the deficit target last week at a meeting with Histadrut chairman Ofer Eini, saying it would head off harm to the country’s workers. The finance minister acknowledged, however, that if he failed to raise the target, he would have no choice but to hit the workers in their pockets through salary and benefit adjustments.
For his part, Eini said Lapid should think twice before taking such steps as the labor federation chairman would not hesitate to do battle with the Finance Ministry on the issue.
Former Finance Ministry director general Avi Ben-Bassat, who was also a senior Bank of Israel official, expressed support for Fischer’s stance that the deficit target not exceed 3% this year and next.
Although it was clear that the target would not be met, it sent an important signal both domestically and internationally over the government’s intentions, Ben-Bassat said, adding that the Finance Ministry should develop a budget premised on policy that would have put Israel within the 3% spending limit if the budget had been implemented at the beginning of the year.