Treasury Seeks Big Cuts in Israel's Defense Pension Spending

Ya’alon says reductions can’t be imposed without unions’ consent; ministers back NIS 596m cut in ministry procurements spending.

The cabinet approved a 4% cut in the procurement budget for most government ministries next year, with the aim of saving NIS 596 million as the treasury scrambles to compensate for a package of tax hikes and budget cuts it approved last week.

The reduction came as the government sought to squeeze savings out of the NIS 51 billion defense budget for 2014.

In a meeting of the security cabinet late Saturday night that stretched into the early hours of Sunday, Finance Ministry Accountant General Michal Abadi-Boiangiu argued the case for NIS 3 billion in cuts to the defense budget’s civilian spending − first and foremost allocations for pensions.

But Defense Minister Moshe Ya’alon said it would be almost impossible to cut civilian spending − which will amount to a projected NIS 22 billion in 2014, or about 40% of the total − because salaries and other conditions are linked to the rest of the public sector under collective labor agreements.

Ya’alon noted that such concessions were not being sought elsewhere in the public sector, and that in any event any changes would have to be negotiated with the Histadrut labor federation rather than be imposed unilaterally by the treasury.

Abadi-Boiangiu said the pension portion of the defense budget was too big and growing too fast. This year, it will amount to NIS 6.14 billion and next year grow to NIS 6.82 billion, or 13.3% of the total, including U.S. aid. She noted that pensions cost just NIS 4.69 billion last year, and NIS 4.47 billon in 2011.

Prime Minister Benjamin Netanyahu, who attended the meeting, reportedly sided with Abadi-Boiangiu, saying he couldn’t accept the assumption that pension appropriations are inflexible. He recalled that, as finance minister in 2003, he was met with the same arguments by the defense establishment, but in the end he succeeded in cutting pension allocations by tens of a percent.

The cuts in ministry procurement budgets approved on Sunday won’t apply to the defense, education or social affairs ministries, or to the transportation ministry’s development budget, the cabinet decided.

The spending cuts will help offset the loss of projected revenues after the treasury agreed to withdraw plans to force housewives to pay National Insurance and also health taxes on them. It also agreed to rejigger income tax increases and other measures − concessions that cleared the way for the Knesset Finance Committee to approve the budget and the accompanying Economic Arrangements Bill.

“The move is necessary for returning to responsible [fiscal] policy and will prevent the country from going bankrupt,” Finance Minister Yair Lapid told the cabinet.

As a result of the decision, the budget for the President’s Residence will be cut by NIS 677,000 in 2014; the budget of the Prime Minister’s Office reduced by NIS 53 million; and the Finance Ministry budget will drop by NIS 17 million.

The Public Security Ministry will suffer the largest cut: NIS 111 million. The budget for higher education will be slashed by NIS 48 million; the Foreign Ministry and Housing and Construction Ministry will each have their budgets rolled back by NIS 24 million; and the Economy Ministry budget will be reduced by NIS 52 million. Allowances and support payments of various kinds will be rolled back by NIS 76 million.

The defense budget, however, remains a key target in the treasury’s efforts to cut spending, which it is being forced to do as the economy slows and Netanyahu’s previous government undertook huge spending commitments without taking into account their impact on future budgets.

The Finance Ministry Account General’s Office estimates that the government’s total pension obligation to the defense establishment, including the police and prison services, amounted to nearly NIS 258 billion at the end of 2011 − an amount equal to 1.6 times the entire state budget for that year.

That same year, the government’s total actuarial commitments came to NIS 560 billion, meaning the defense establishment accounted for nearly half the total.

During 2011 and 2012, defense retirees were successful in a struggle with the treasury over their pension rights. As a result, a career soldier received a monthly pension last year averaging NIS 16,605 ‏(according to treasury statistics‏). Moreover, the average retirement age for career soldiers is 46, compared with 63 for ordinary civil servants. For the police, the average monthly pension in 2012 was NIS 10,089 and the average retirement age 54.

GPO