Israel's Treasury Mulls Breaking 2013 Budget Framework

But officials hope they can retain confidence of financial markets by limiting the deficit.

The Finance Ministry is preparing for the possibility that the 2013 budget will violate the fiscal framework that the government has set for itself.

Treasury officials said yesterday that they see no way of squeezing the NIS 12 billion to NIS 14 billion of savings needed to prevent the spending package from exceeding government targets.

They do not expect the Knesset to approve the budget until May or even as late as June.

Nevertheless, treasury officials are hoping they can maintain fiscal credibility and the confidence of the financial markets. Officials say the government aims to return to the parameters of the budget framework in 2014, so that markets will look on this year as a one-time event. Moreover, officials still believe they can keep the deficit to 3% of gross domestic product in 2013. Last year, the deficit rocketed to 4.2% of GDP, double what it was targeted to be.

In December, Bank of Israel Governor Stanley Fischer said he could accept breaking the framework so long as the deficit target was kept to 3%.

Treasury officials are beginning to get back to business after a lengthy hiatus due to elections. Finance Minister Yuval Steinitz met with senior staff at the beginning of the week to assure them he was committed to running the ministry diligently until a new government is formed, whether or not he retains the portfolio. This evening he will meet with top officials, including director general Doron Cohen and budgets director Gal Hershkovitz, to discuss the 2013-2014 budget. But sources said that until a new government is formed and sets its spending priorities, there will be a limit to how much officials can do to prepare a spending package.

The Finance Ministry will have a difficult time achieving its fiscal goals this year and next. Keeping within the budget framework would require deep spending cuts even in 2014 - around NIS 20 billion. In order to meet the 2013 deficit target, they will have to raise taxes sharply. Thus, if budget planners decide to keep spending cuts to NIS 10 billion this year, instead of the NIS 14 billion now being considered, they will have to come up with NIS 4 billion in extra tax revenue.

The budget framework - a package of rules that act as the long-term basis for fiscal policy - fix the amount by which government spending can grow from year to year. Under the rules, spending cannot exceed NIS 300 million in 2013, or about NIS 13 billion more than in 2012. That equals growth of 2.9% after inflation, and nominal growth of 5%.

At the moment, treasury officials are planning a two-year budget, for 2013-2014, because the 2013 budget will be approved by the Knesset so late in the year. But planners are working backwards - preparing the 2014 package, which will represent a full year of spending, and applying those parameters to the second half of 2013, which is when the 2013 budget will go into force.

The task in constructing the 2014 budget is complicated in its own right because the government has undertaken so many new spending commitments for the year, equal to some NIS 20 billion more than the budget framework allows.

To close the hole, the treasury is planning a series of deep spending cuts, including NIS 3 billion to defense, another NIS 3 billion in public sector wages, some NIS 2 billion to NIS 3 billion from child allowances and a similar amount from infrastructure spending. All of these reductions, assuming the cabinet and Knesset approve them, amount to just NIS 12 billion, at the most. Budget planners will have to come up with as much as another NIS 10 billion in savings.

They are now exploring various possibilities, among them efficiency steps such as reducing the number of ministries or putting off scheduled spending increases. Officials say finding NIS 20 billion in cuts for 2014 would be virtually impossible, as would be finding NIS 12 billion to NIS 14 billion in 2013, especially as the savings have to be wrung out of spending entirely from the second half of the year.

Given the difficult challenges, officials say that they will have to settle for limited spending cuts and tax hikes that at least keep the deficit to 3% of GDP. To do that, they may have to impose a one-time tax increase in 2013.

Michal Fattal