Netanyahu, Lapid Still Unable to Resolve Budget Dispute

Prime minister and finance minister fail to bridge differences over defense spending and fiscal deficit in 5-hour meeting, will try again later in week.

Emil Salman

A five-hour marathon meeting on Sunday between Prime Minister Benjamin Netanyahu and Finance Minster Yair Lapid and their top aides failed to bridge the gaps over defense spending and the rest of the 2015 budget.

Sources who attended the meeting said the treasury showed some flexibility on key issues, but not nearly enough for the session to end with any concrete results.

Netanyahu and Lapid – whose budget standoff has led to growing speculation that Lapid will bolt the coalition, or that the prime minister will call early elections – will meet alone later this week, to try and resolve the crisis.

Meanwhile, treasury officials at the meeting presented a bearish forecast for next year’s economy. They estimated that gross domestic product would grow just 2%, meaning per capita growth will be nil.

As a result, tax collections will inch up by just 3 billion shekels ($830 million), compared to this year, they said. That will give treasury officials little room to maneuver between the defense establishment’s demands for 11 billion shekels or more in additional spending, while keeping to Lapid’s vow not to raise taxes and calls by the Bank of Israel and Netanyahu not to allow deficit spending to widen too much.

The standoff between Netanyahu and Lapid has been the main factor in putting the budget-deliberation process months behind schedule. The cabinet, which normally debates the next year’s pending package over the summer, has yet to hold a single session on the matter.

Defense spending is the biggest bone of contention. The army is seeking 9 billion shekels for costs incurred during Operation Protective Edge, another 11 billion in 2015, and a further 8 billion to 10 billion over the next five years.

Netanyahu reiterated on Sunday that he favors the supplements, although he has been careful to say he also favors keeping a lid on deficit spending. At a conference on cyber security in Tel Aviv, he said he sees higher defense spending as a fillip for the economy, citing Iron Dome and the barrier erected on Israel’s border with Egypt.

“I remember there was much criticism [when spending was allocated to the two projects] about the excessive amounts we’re investing in security. I don’t want to imagine what would have happened to the Israeli economy and the State of Israel if we hadn’t made those investments,” Netanyahu said.

“Now, facing growing threats in our region, we need to significantly expand the defense budget by billions more,” he added.

Sources at yesterday’s meeting said that Lapid and treasury officials apparently moved a little, but not nearly enough, on their demand that the defense increase be limited to just 2.5 billion shekels. Netanyahu instructed them to build three scenarios for the budget, tax rates and the deficit in 2015, based on defense spending being either 4 billion, 6 billion and 8 billion shekels.

Amir Levy, the head of the treasury’s budget division, told the meeting that, given all the limitations on the budget, across-the-board spending – including defense and civilian costs – could rise by more than 8 billion shekels.

The treasury is proposing a deficit of 3.18% of GDP for 2015, wider than the 2.5% officials had originally been planning. It represents a compromise between Netanyahu and Bank of Israel Governor Karnit Flug – who both advocated a cap of 3% – and Lapid, who was prepared to let it go much higher.

At 3.18% versus 3%, according to Levy, the government will give itself an extra 2 billion shekels of badly needed money without any tax hikes. In a press statement, the treasury termed it “an answer to the demands of the defense establishment to a budgetary supplement, while preserving the spending framework that has been set.”

However, the Defense Ministry wasn’t mollified. “The treasury’s proposal is a sham and totally detached from reality,” said one senior defense official, who asked not to be named. “In practice, they’re not talking about a supplement but a budget that is lower than the defense budget is in 2014, not counting Protective Edge spending.”

The defense budget this year is set to reach 64.95 billion shekels, of which 5.75 billion shekels reflects extra spending it received over the course of the year and 1.5 billion shekels for costs related to Protective Edge. For now, the 2015 defense budget is set at 59 billion shekels, not counting the 11 billion extra the army is seeking.