Israel’s Finance Chief Seeks to Raise 2015 Budget Deficit to 2.9%

But sources say Finance Minister Yair Lapid seeks cuts in military spending if the current turmoil recedes.

Ofer Vaknin

Finance Minister Yair Lapid has recommended an increase in the 2015 budget deficit to 2.9% from 2.5% of gross domestic product, a move that would let the government spend 32 billion shekels ($9.3 billion) more than it takes in next year.

Lapid made his decision following a number of contentious meetings with top finance officials over the weekend. Currently, the budget deficit provided by law is 3% for this year and 2.5% for 2015, so increasing next year’s figure to 2.9% would give policy makers greater leeway in crafting the budget.

But Lapid, who advocated for the 2.5% number last year, will have to secure the approval of the Knesset.

Lapid, who as head of the centrist Yesh Atid party was elected on a platform that appealed to middle-class voters, was actually pushing for a higher deficit than 2.9%. Officials at the Finance Ministry budget division were seeking 2.75%, while Bank of Israel Governor Karnit Flug wanted 2.5%.

If the 2.9% figure is approved, Lapid will be able to make good on his promise not to raise taxes next year when he submits his draft budget to the cabinet and the Knesset. The Finance Ministry’s budget division, however, hopes to tweak tax provisions for agencies such as the Jewish National Fund in order to generate additional revenue for the treasury.

In monetary terms, a government deficit of 3% of gross domestic product for 2014 represents maximum overspending by the state to the tune of 33 billion shekels. So in presenting a deficit ceiling of 32 billion shekels for next year, Lapid will still be able to portray himself as an agent of fiscal restraint.

Lapid also argued that the issue is not the budget deficit or the country’s ratio for debt to gross domestic product. Instead, he says he is worried lest Israel’s export-oriented economy suffer an economic slowdown due to sluggish growth in Europe and the United States. As a result, he contends, if Israel does not wish to see its own economic growth slump to 2%, taxes should not be increased.

One challenge for officials crafting the budget is that some government commitments are multiyear, including not only increased spending on existing programs but also spending on new multiyear programs that would infringe on the 2015 budget.

Although a 2.9% deficit ceiling would add 8 billion shekels to the budget, policy makers would still have to make spending cuts — even if these wouldn’t be as large as the Bank of Israel projected just two months ago.

Automatic increases for next year as a result of ongoing government commitments and the growth of Israel’s population will grab 12 billion shekels to 13 billion shekels of government spending next year. If the 2.9% deficit ceiling adds 8 billion shekels to the government’s available funds, the automatic increases will still require cuts of 4 billion shekels to 5 billion shekels in other budget items.

Another problem facing Lapid is that the defense establishment seeks a 3-billion-shekel to 4-billion-shekel increase in its allocation for next year, after receiving 1 billion shekels more this year. This would eat up about half the 8 billion shekels in available additional funds and hinder the government’s ability to boost funding for government ministries that deal with social welfare and education.

Sources say Lapid is planning to demand cuts in military spending, although there is no guarantee that he will succeed. Much depends on public sentiment, on the military situation in the Gaza Strip and the West Bank, and the inclinations of Prime Minister Benjamin Netanyahu, who in recent years has tended to accede to the military’s spending requests.