The dramatic headlines declaring that Israel had found itself in a budget deficit in October came across as a sophisticated production by the Finance Ministry clerks and Prime Minister Benjamin Netanyahu, except that each party has a different interest in the matter.
On Sunday Netanyahu held a meeting with Finance Ministry officials regarding the defense budget, and set a follow-up meeting for Wednesday. The meeting was declared urgent – so urgent that Finance Minister Moshe Kahlon wasn’t even invited, and it had to be rescheduled.
>>Kahlon’s failure | Editorial
Netanyahu has always sought to come off as Mr. Economy, and if he can embarrass Kahlon a bit in the process, even better. This time he needs more than that. Over the past few months he’s been working to dramatically increase the defense budget as part of the 2030 defense plan. This is big money, some 30-40 billion shekels ($8.1 to $10.8 billion) over the next decade.
The Finance Ministry officials have a different agenda – making sure the government doesn’t overshoot its deficit target and make sure the budget is handled properly. They know Netanyahu’s defense plan cannot be carried out without finding a source for that money - raising taxes, cutting the state budget elsewhere, or raising the deficit. They’re facing a finance minister who initially listened to them, but for the past year cut contact and has been running an elections economy.
On Monday night, the Finance Ministry published its monthly report of revenues and expenses, indicating that the deficit was at 3.6% of the GDP for the past 12 months, which is about 9-10 billion shekels above the government’s target of 2.9%. And this is happening as we’re heading into an election year, and Netanyahu and Kahlon are full of ideas of what to do with money we don’t have.
Finance Ministry Director General Shay Babad found himself explaining two contradictory things – that things are under control and that ultimately Israel will overshoot its deficit target for 2018 by only 3-4 billion shekels, but also that we’re in trouble because Netanyahu wants to increase the defense budget and Kahlon signed an agreement to raise police officers’ salaries by 16 billion shekels over the next few years.
It’s hard to say that things are both good and not good at the same time, but Finance Ministry officials are practiced at sowing panic and finding solutions for their own concerns. Particularly when it’s the end of a financial year and expenses can be pushed off for next year. Exept this time it’s more complicated, because the 2019 budget was passed long ago, and hard decisions are needed before the year begins.
Netanyahu has said in internal discussions that he would accept a 4% deficit in order to strengthen Israel’s defense, but he too knows that this could hurt Israel’s credit rating. And once taking into account other commitments, such as the officers’ salaries, Israel could find itself well over its deficit target and the economic troubles could mount quickly. This is where Finance Ministry officials need to step on the breaks and present alternatives – raising taxes or deep cuts to other budgets. There are no other options. And there’s no place for creative declarations such as “We’ll raise expenses now, and we’ll talk about revenues in the future.”
Overshooting the deficit target could have been brushed off as a small matter, if we weren’t right before elections. But at the moment, the considerations of Netanyahu and his ministers are skewed, and they’re liable to override the existing restraints if they really want to. At the moment, they’d be best to put off any difficult budget-busting decisions until after the election. These are matters that will affect Israel for several years, and waiting a few more months won’t make a difference.
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