With the deadline for bringing the budget to the Knesset getting dangerously close, Treasury officials said on Tuesday they are starting to worry that Israel will be starting the new year without one in place.
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The cabinet, which usually begins budget deliberations at the end of June, has yet to schedule its first meeting on the matter after one slated for Thursday was put off indefinitely. Officials are now talking about a first meeting in early October.
Under the law, the Knesset must get the budget legislation 60 days before the end of the year, which means that if the cabinet only meets before Yom Kippur (October 4), treasury officials will have a little more than three weeks to prepare it.
Such a delay would undermine the government’s ability to cope with a tepid economy, which some economists say may slip into a recession. In the second quarter economic growth slowed to just a 1.7% annual pace.
Under the law, this year’s budget would remain in force into 2015, with the treasury authorized to spend 1/12th of 2014 appropriations every month. As a result, the government could do nothing to adjust tax and spending policies to help the economy.
Although Operation Protective Edge caused much of the delay in beginning work on the budget over the summer, officials at the Prime Minister’s Office, Finance Ministry and Bank of Israel said the main problem is a political standoff between Prime Minister Benjamin Netanyahu and Finance Minister Yair Lapid.
The two were supposed to meet on Monday to iron out their differences, but the meeting was canceled without any new date announced. On Wednesday they will be part of a wider forum that includes treasury officials and Eugene Kandel, chairman of the National Economic Council, to discuss the budget and the Arrangements Law.
But, officials noted that Wednesday’s meeting would be technical, with treasury officials presenting their forecast for tax revenues as well as general goals and priorities.
Netanyahu, a bitter political rival of Lapid’s, has said little publicly about his view on fiscal and economic policy, although he did let it be known through ultra-Orthodox lawmakers that he opposed Lapid’s keystone plan for cutting home prices by exempting large numbers of home buyers from the 18% value-added tax.
More broadly, the prime minster favors widening the deficit next year to 5 billion shekels ($1.43 billion), or 3% of gross domestic product, up from the 2.5% now targeted. The rest of the money needed to close the budget gap – which by some estimates could reach 18 billion shekels next year – would come from raising taxes, eliminating tax exemptions and cutting spending.
Netanyahu is expected to accept the defense establishment’s demand for an extra 11 billion shekels in spending next year, on top of the 9 billion it is seeking for 2014.
Lapid is taking a tougher line on increasing the army’s budget – the treasury is prepared to give the army an extra 2.5 billion shekels next year – and he dismissed out of hand any talk of tax hikes, closing tax loopholes or spending cuts. He has threatened to leave the coalition if his zero-VAT plan isn’t made law.
While officials say the fiscal dilemma can be resolved, both men have stood firm on the positions.
The prime minister has signaled he might be prepared to shake up the coalition, replacing Laid’s Yesh Atid party and possibly Economy Minster Naftali Bennett’s Habayit Heyehudi with Haredi parties and Labor, officials said.
Alternatively he could call early elections, although neither he nor Lapid are in strong positions right now to go to the voters. Under the law, the government will automatically fall if no 2015 budget has been approved by the Knesset by March 31 next year.
As evidence of his intentions, officials pointed out that Netanyahu has been meeting more frequently with Haredi lawmakers. Lapid has spoken out publicly more often than usual about the peace process.