The agreement announced early Tuesday morning allowing the largest Knesset faction, Kadima, to join Prime Minister Benjamin Netanyahu's coalition government, boosted the number of coalition MKs to 94 in the 120-seat Knesset, making it one of the largest coalition blocs in Israel's history.
Such a large coalition should have economic consequences as well. It will enable the prime minister, along with Finance Minister Yuval Steinitz and their other cabinet colleagues, to pass the 2013 budget with relative ease.
The large coalition will also allow Netanyahu and Steinitz to pass legislation based on the recommendations of the Shani committee on corporate economic concentration more easily than anticipated, and will also pave the way for the government to move ahead on privatization and reform measures and structural changes, including some that had been thought problematic.
Officials in the Prime Minister's Office were in a celebratory mood yesterday. They said their boss would benefit from the unity government in a host of ways, including promotion of his economic and social welfare agenda with a minimum of complications. The unity agreement was forged under a veil of secrecy, they said, with only Netanyahu's closest associates aware of what was in store.
The officials promised that Netanyahu's economic policy approach of the last several years would continue to guide him in the future, and noted that among the economic decisions the prime minister will have to make is whether the next budget should be of a one- or two-year duration.
Legislation recently presented to the Knesset Finance Committee provides that Israel's budgets cover two years, with the exception of election years and years of financial crisis. But now the prospect is that the election will be held in October of next year, meaning a one-year budget for 2013.
Sources in the Prime Minister's Office said the coalition agreement between Netanyahu and Kadima leader Shaul Mofaz provides for "increasing competition in the economy and reduction of economic concentration," which they say have been major priorities for Netanyahu over his past three years as prime minister. The agreement with Mofaz also calls for strengthening the weaker segments of the population as well as the middle class, they said.
The unity agreement with Kadima formally commits the government to following: "Promotion of the equitable distribution of the state's resources, the creation of an economic and social safety net for poorer populations and the middle class, increased competition and reduced economic concentration in the Israeli economy, increased enforcement of labor laws and the bridging of social welfare disparities."
An interesting provision in the agreement also commits the government to developing a national emergency budget that will enable Israel to confront the global economic crisis "in an effort to strengthen the poor and the middle class." Sources in the Prime Minister's Office said the provision is really designed head off extortionist demands from within the government.
Despite the election talk, the staff of the Finance Ministry has been moving forward on preparing a 2013 budget as usual, with daily targets for the staff of the budget division as well as other departments. Currently the staff is dealing with the expenditure side, and state expenditures next year are expected to exceed this year's. A standing Finance Ministry formula would provide for 2.9% growth in expenditure next year over 2012. Once work on expenditures is completed, and that should happen this month, the staff will turn its attention to the revenue side, which is supposed to result in a deficit of no more than 1.5% of the GDP.
This year's deficit has been revised to 3.3%, but is expected to be even larger. State revenue is running lower than expected this year and next year's budget will probably exceed the limit of 1.5% of GDP. After changes are made to reflect comments by Steinitz and then Netanyahu to the draft of the budget, it will be presented to the cabinet for approval in July.
The 2013 budget presents major problems, however, with outside economists as well as their counterparts at the Bank of Israel speaking of at least a NIS 10 billion budget shortfall on the expenditure side, and a shortfall of similar magnitude on the revenue side, which should force the government to cut costs and raise taxes. An increase in the value added tax rate from 16% to 17% might even come during the second half of this year.
The agreement this week on bringing Kadima into the government clearly increases the chance that the proposed 2013 budget will be approved by the Knesset. It is quite possible that if the unity government had not been forged, the budget the Finance Ministry is preparing, with its expected spending cuts and tax increases, would not have gotten Knesset approval. And that would have led to an election.