Finance Minister Yair Lapid told Prime Minister Benjamin Netanyahu and Bank of Israel Governor Stanley Fischer yesterday he plans to cut some NIS 26 billion from the 2013-14 budget.
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About NIS 9 billion of that hefty spending cut would take place in the last five months of this year when the draft budget is finally in force, with the rest coming in 2014.
Lapid’s austerity plan also includes tax hikes to raise some NIS 5 billion in in the second half of this year and NIS 12 billion to NIS 14 million in 2014.
The long-awaited budget proposal sets a modest target of NIS 231 billion in tax collections in 2013, he told Netanyahu and Fischer at a meeting at the Prime Minister’s Office.
Lapid said the deficit would be 3% of gross domestic product, marking the end of an effort to convince Fischer over the past several days to accept a more flexible target of 3% to 3.25%.
“It’s true that there will be spending cuts and tax increases, but this is temporary,” Lapid told members of his Yesh Atid Party yesterday. “The budget deficit is a hurdle. But within two years every citizen of Israel will feel a change [for the better] and be living in a country that treats his money with respect.”
A month in office, Lapid has been struggling to get the country’s fiscal house in order at a time when the economy is slowing and tax revenues have failed to meet forecasts, while Netanyahu’s previous government undertook spending commitments. The budget deficit for the first quarter ballooned to NIS 4.6 billion, nearly triple its level the year before.
Israel is now operating under the framework of the 2012 budget, spending on a month-by-month basis until the Knesset can approve a new spending package. Since it is unlikely to do that before July, the budget will encompass the rest of 2013 and all of 2014, after which Israel will return in 2015 to an annual budget.
Lapid and treasury budget director Gal Hershkovitz said the lion’s share of the cut will come from defense and child allowances, each amounting to about NIS 4.5 billion over 2013-14. Public sector wage increases will be frozen while a freeze on hiring and promotions should save up to NIS 5 billion, the treasury estimated. Infrastructure spending will grow less than originally planned and more financing will be shifted to the private sector. The rest of the spending cuts will come from specific items the treasury deems inflated or unnecessary.
Yacimovich: Lapid echoes Netanyahu
In contrast to traditional policy, officials said the 2013-14 spending cuts will not be imposed across all ministries, unless the fiscal situation becomes so dire that there is no other choice.
Labor Party leader Shelly Yacimovich attacked the budget plan as business as usual. “Lapid is presenting Netanyahu with his [budget] framework, but he didn’t have to present anything because it’s exactly the framework Netanyahu advanced on the eve of the elections,” she said.
This year is expected to be a difficult one for tax revenue. Collections are forecast to reach NIS 231 billon, up 6% from NIS 218.6 billion last year, which was also a tough one for the Tax Authority. The treasury seeks to raise by one percentage point the income tax on all brackets, as well as on the value-added tax to bring it to 18%, and on corporate income tax to increase it to 26%.
“It won’t be an easy budget. We need to deal with a NIS 35 billion deficit,” Lapid said. “We won’t try to hide behind the deficit, but to deal with it as an opportunity that demands that we change our priorities and put the working man at the center of attention, without ignoring the needs of the weak.”
Lapid, who has come under fire for focusing too much on the needs of the middle class at the expense of lower-income groups, stressed that one group relied on the financial strength of the other. He told ultra-Orthodox politicians that they would have to accept the cuts in child allowances. “The one who is responsible for paying the costs of raising children is their parents,” he said. “Bringing children into the world is a heavy responsibility and can’t be done on the assumption that others will pay for them.
“In my eyes, to say we need to help the poor without asking where the help will come from is not a policy but simple empathy,” he said. “You need a strong middle class and working public and taxpayers to help them. If they ignore the populist debate now underway over the budget, anyone who looks at it will recognize it as a budget of hope.”
Participants in the meeting raised the idea of reaching an early understanding with the Histadrut labor federation over the budget, which includes a plan to reduce salaries and benefits in the public sector. The plan also calls for eliminating he tax benefits for wage earners investing in advanced-training funds, a move the unions have vowed to fight. Starting today, the Finance Ministry also plans a series of consultations with cabinet ministers and other senior government officials whose offices are slated for sharp spending cuts.