Lapid to Meet Labor Federation Chief to Prevent Clashes Over Israel's New Budget

Finance Ministry needs Histadrut labor federation's consent for plans to cut salaries, cancel pay raises for the public sector and delay benefits promised to doctors, nurses and social workers.

Finance Minister Yair Lapid plans to meet with Histadrut chief Ofer Eini as soon as next week to reach preliminary understandings on key issues for the 2013-14 budget.

The treasury plans to cut public-employee salaries, reduce National Insurance Institute allowances, and reduce the number of tax exemptions.

Lapid intends to reach understandings with the Histadrut labor federation based on understandings that preceded the 2009-10 state budget, in order to prevent work slowdowns and strikes.

The 2013-14 budget calls for massive cuts in public-employee salaries worth NIS 5 billion. The Histadrut opposes any such cut. The treasury clearly prefers dialogue and a preliminary agreement with the Histadrut rather than unilateral moves.

The treasury plan would cut salaries by 2.5%, cancel or postpone other minor payments in 2013 and 2014, increase employee pension contributions from 2% to 5% and cancel the 1% public-sector pay raise scheduled for July 1. The treasury would also postpone or spread out salary benefits promised in 2011 and 2012 to striking public-sector workers such as doctors, lawyers, nurses and social workers.

The treasury will have a hard time carrying out these steps without the consent of the Histadrut, which certainly won’t give blanket approval. The opposition, including the ultra-Orthodox parties and certain Likud MKs such as Haim Katz, may back the Histadrut.

The overall cuts for the second half of 2013 and 2014 amount to around NIS 30 billion, drawing from defense, child allowances, government salaries, infrastructure and other areas such as generous payments to settlements and the ultra-Orthodox.

The treasury wants to cut the defense budget by NIS 3 billion from the 2012 level of NIS 60.5 billion and is slated to start discussing the issue with the Defense Ministry and Israel Defense Forces today.

Planned cuts for child allowances via the NII are between NIS 3.75 billion and NIS 4.5 billion. The 2012 budget was NIS 7.5 billion in this area. Treasury officials do not expect opposition because there are no ultra-Orthodox parties in the government, though the Histadrut might take ownership of this issue.

Government-employee wages, which currently total around NIS 120 billion annually, are set to be cut dramatically after surging over the past few years. Raises of between NIS 12 billion and NIS 13 billion are on the chopping block; treasury officials say they’re not talking about salary cuts but rather freezes or cancellations of promised raises of about NIS 4 billion to NIS 5 billion for the 2013-14 budget.

Regarding infrastructure and mass transit, the treasury is considering turning government-funded projects into joint projects with the business sector along the build-operate-transfer or private-finance-initiative models. In such projects the private sector builds the project, charges a toll for 25 to 30 years and then transfers it to the state.

Treasury officials say such arrangements would reduce the increase in government investments to NIS 6 billion from NIS 8 billion without impairing the infrastructure vital for economic growth.

Officials say reducing inflated or unnecessary budgets, including funds for settlements and the ultra-Orthodox, should save NIS 7 billion to NIS 9 billion annually in the two-year budget.

Regarding taxation, proposals to cancel several items were examined last week. Canceling the value-added-tax exemption on fruits and vegetables, canceling it for Eilat, and canceling tax exemptions for continuing education funds would save around NIS 2.5 billion, NIS 600,000 and NIS 4 billion respectively.

Other ideas are to increase the capital gains tax by between NIS 3 billion and NIS 4 billion; increase income tax at all levels by 1%, worth between NIS 3 billion and NIS 4 billion; raise VAT from 17% to 18%, adding NIS 4 billion to state coffers; increase corporate tax by a percentage point to 26%, adding NIS 700,000 to state revenue; and increase taxes on fuel and alcoholic beverages.

The planned Economic Arrangements Bill includes a host of reforms and structural changes for the economy; it will be presented to the government with the budget for the period through December 2014. The reforms should make an impact beyond 2014.

The main reforms will focus on housing, including the planning stage, development and marketing. The goal is to make housing more available and cheaper.

Special attention will be paid to evacuation and construction projects to release massive amounts of land for new housing, and the treasury will move to set up a fund for National Master Plan 38 for evacuation and construction projects.

The arrangements bill will also seek to reduce bureaucracy. Among the structural changes, Israelis will be encouraged to join the labor force, not just ultra-Orthodox and Arabs but also Israelis who receive income support or need professional retraining. The treasury is also considering raising the retirement age.

Also, a cut in the number of regulations on budget administration from 1,700 to 1,500 will be recommended to increase ministries’ freedom of operation and let the budgets division focus on managing the state budget.

Olivier Fitoussi