Lapid, Flug Stake Out Rival Stances on 2015 Budget Deficit, Taxes

Finance minister makes case for bigger deficit and no new taxes, while Bank of Israel governor urges caution.

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Finance Minister Yair Lapid, August 8, 2014.
Finance Minister Yair Lapid, August 8, 2014.Credit: Ofer Vaknin

Just days after they met to ease tensions between them, Finance Minister Yair Lapid and Bank of Israel Governor Karnit Flug resumed their battle over the 2015 budget and finding the correct mix of tax rises and deficit spending.

Speaking at a Tel Aviv conference sponsored by the Calcalist financial daily, Lapid said Israel faced two options – the first to raise taxes to ensure that the budget deficit doesn’t widen excessively, and the second, which he termed “my preference,” to avoid tax hikes and let the deficit increase.

“We have to recognize that a low deficit is not a goal in and of itself,” he said. “A low deficit is there to give the economy a security blanket in the event something unusual happens, like a hurricane, a global crisis or a military action. What we did in 2013-2014 has enabled us to absorb most of the costs for the military operation this year.”

Following Lapid’s address, Flug rejected any idea of widening the budget deficit next year above 3% of gross domestic product, saying that anything above that would increase Israel’s ratio of debt to GDP. That would saddle Israel in the future with even bigger interest rate payments than the 38 billion shekels ($10.6 billion) it spends now, leaving less money for education, health and social welfare, Flug said.

“There are those claiming that the needs of the moment demand that we increase the deficit to support the economy. I believe we can justify a certain increase over what was planned in the deficit to cover the costs of fighting Operation Protective Edge, which can be characterized as a one-time event, and because the economy is slowing,” Flug said.

“But going above that, in other words a deficit in excess of 3% of GDP, will be sending a clear signal that we have retreated from our commitment to fiscal discipline,” she said.

Lapid and Flug have emerged as the heads of rival camps over how to cope with the costs of the 51-day Gaza conflict and the defense establishment’s demands for some 11 billion shekels of extra spending next year. The problems have been complicated amid growing indications that the economy – and thus the government’s tax revenues – may be running down.

Ironically, deliberations over next year’s budget were delayed over the summer because of Protective Edge. The cabinet is only due to meet for the first time on the 2015 spending package a week from now.

Lapid hinted as a tough stance against the army’s money demands, saying Israel’s security wasn’t just a matter of arms.

“If we don’t give [money] to education, we won’t raise the next generation of 8200,” he said, referring to the army intelligence unit and breeding ground for high-tech entrepreneurs. “If we don’t have 8200, Kassam rockets will keep hitting schools in Nahal Oz and Sderot and there won’t be any education. The defense establishment has enough fat to gain efficiency and save [money].”

Flug didn’t come down on one side or other in the debate, but warned against trying to increase defense spending and civilian spending at the same time. “I would like to tell you that the government can do one and the other, and now. … But it is clear that thinking you can do it all here and now is an illusion.”

Meanwhile, Rakefet Russak-Aminoach, CEO of Bank Leumi, warned that a slowing economy meant policy-makers had to move quickly.

“To do that we need to increase the deficit. In addition to that, we have no choice but to deal with the income side as well, and to do that by eliminating tax exemptions, not by making news,” she said, in an apparent reference to Lapid’s controversial plan to exempt many home buyers from the value-added tax.

With reporting by Michael Rochvarger.

Bank of Israel Governor Karnit Flug.Credit: Emil Salman

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