Netanyahu and Lapid Close to Agreeing on 2015 State Budget

Compromise unlikely to solve all the conflicts surrounding budget, with defense establishment unlikely to accept plan granting only half of what it’s demanding.

The Good Old Days: Lapid and Netanyahu during the previous government.
Emil Salman

Prime Minister Benjamin Netanyahu and Finance Minister Yair Lapid have formulated an outline for an agreement over the weekend on the state budget for 2015.

Speaking to the media outside his home in north Tel Aviv, Lapid said he will meet the prime minister against on Sunday to continue to work on the budget, adding that he estimates they are close to an agreement.

The agreement calls for raising the deficit target to 3.4 percent of gross domestic product, up from 2.5 percent – a move that will expand the budget by 10 billion shekels ($2.7 billion). They also agreed to increase the defense budget by 6 million shekels. The defense establishment had been calling for an extra 11 billion, while the Finance Ministry had initially said it would allow only another 2.5 billion shekels.

The two also agreed that Lapid’s flagship bill, which would exempt some first-time buyers from VAT on a new home, would receive Knesset approval.

In addition, taxes will not be raised next year, tax exemptions will not be canceled, and ministry budgets will not be cut. Also, tax collection will be increased while the authorities step up their campaign against the underground economy.

The agreement was hashed out in discussions over the past few days between senior members of the Prime Minister’s Bureau and representatives of Lapid. Netanyahu and Lapid approved the plan over the weekend.

The two men are expected to meet today in order to finalize matters.

The agreement also includes a list of political compromises relating to peace talks and relations with the Palestinians, as well as legislation being pushed by Lapid’s Yesh Atid party, including on matters of religion and state.

The compromise, which comes after weeks of conflict, has no clear winner or loser, enabling the two to continue working together. They also further prove the cliché that Israeli governments don’t fall over fiscal matters, and that the Knesset is never disbanded during its second year.

Lapid and Netanyahu will have to decide before the cabinet meets to approve the 2015 budget and the accompanying Economic Arrangements Bill.

The timetable is tight. Netanyahu is scheduled to leave for the UN in New York after the Rosh Hashanah holiday, and returns only after Yom Kippur. This means the cabinet must meet between October 5 and November 1, the deadline for handing a budget bill to the Knesset. One meeting may not be enough, and this period also includes the Sukkot holiday.

After the budget and supplementary legislation receive cabinet approval, the finance and justice ministries need to draft it into law by November 1.

Granting the defense establishment an extra 6 billion shekels goes against the framework for the 2015 budget, which called for increasing spending by 2.6 percent from 2014. That would have given all government ministries an extra 8 billion shekels combined.

In addition, public sector workers have been promised raises worth a combined 8 billion shekels.

Therefore, public spending under next year’s budget is expected to increase by 12 billion to 14 billion shekels, compared to this year’s budget. In comparison, during the social protests of 2011, the defense budget grew significantly but the cabinet refused to increase overall spending on ideological grounds.

Lapid and Netanyahu’s compromise is unlikely to solve all the conflicts surrounding the budget. For instance, the defense establishment is not likely to accept a plan granting it only half of the budget increase it is demanding.

In addition, Bank of Israel Governor Karnit Flug and staff at the Finance Ministry had called for the deficit to be capped at no more than 3 percent of GDP. However, they are not expected to make an issue out of Netanyahu and Lapid’s proposal to set the deficit cap at 3.4 percent , due to the slowing economy.

Israel has been decreasing its national debt relative to GDP for the past several years. By increasing the deficit cap, it will be increasing the debt next year.

Knesset sources predicted that legislation on Lapid’s zero-VAT proposal would be advanced after Rosh Hashanah.