Budget Shortfall for 2019-20 Forces Israel's Treasury to Cut Ministry Budgets

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 Finance Minister Moshe Kahlon, in October 2015.
Finance Minister Kahlon, in 2015. Moving to lower the huge exporters' corporate tax to an especially low 6 percent.Credit: Michal Fattal

The Finance Ministry’s budget division issued its projections for the years 2019 and 2020 on Tuesday, forecasting that meeting spending and deficit projections will require adjustments amounting to 20.6 billion shekels ($5.4 billion) in 2019 and 19 billion shekels in 2020.

In an effort not to allow spending to get out of control, the budget division will be carrying out emergency spending cuts totaling 2 billion shekels this year, which will affect all government ministries to some extent. (For separate story on educational spending cuts, see page 1.) And for the first time ever, the budget division is announcing planned cuts for the next three years, also involving 2-billion-shekel cuts for each year until 2019.

The adjustments will mean government spending cuts or increased taxes, or a combination of the two.

The deficit ceiling for 2019 is 2% of Israel’s gross domestic product, while for 2020 it’s 1.75%.

The problem the budget division anticipates relates to the prospect that tax revenues will fall short in 2019, due to tax cuts. Tax revenues are currently running ahead of projections (see separate story below). But the forecast is that in 2019, tax revenues will fall short 12.5 billion shekels to meet budget deficit targets. The shortfall for 2020 is projected at 14.5 billion shekels.

Because many of the state’s spending commitments extend over a number of years, the government is required to look ahead and assess the situation now so that future spending will not spiral. The situation doesn’t require a full cut of the amount of the projected overspend, but it still requires a 6-billion-shekel cut in 2019 and a 4.4-billion-shekel cut in 2020. The rule only relates to spending and leaves the decision regarding future tax increases to the relevant spending year.

It is because the Finance Ministry has failed to rein in future spending that it is apparently carrying out cuts to spending this year, even though the actual budget deficit this year is expected to be relatively low (see separate story below). By lowering spending this year, the treasury also set a lower basis for spending increases in subsequent years, because the increases in the coming years are based on this year’s spending.

In announcing the spending cuts that will come into effect in another two and a half years, in 2019, the budget division is giving the ministries time to prepare. Those cuts, of 2% per ministry, represent about 2 billion shekels in current monetary terms.

Another possible step the Finance Ministry is suggesting in order to cut spending is to reduce the number of government ministries or, alternatively, instituting uniform cuts of 400 million shekels in the budgets of the ministries.

As a first step, the Finance Ministry is proposing setting up an interministerial task force that will consider cutting back on the number of ministries in 2019 – a year that is expected to be a Knesset election year, unless the election is moved forward.

A team that has examined the ministries that comprise the Israeli government found that Israel has a larger number of ministries than is usual in the developed world. The team looked at the member countries of the Organisation for Economic Co-operation and Development (OECD), of which Israel is a member, for comparison purposes.

Treasury sources say head office overheads at the various ministries represents between 35% and 45% of ministry spending. A cut in the number of ministries is, therefore, expected to result in a sizable saving that could be used to help address the spiraling deficits the Finance Ministry is seeking to head off in future years.

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