Despite Objections, 3% Budget Deficit for 2013 Set for Cabinet Approval

Government expected to support bill to increase deficit, despite criticism from Bank of Israel Governor Stanley Fischer.

Prime Minister Benjamin Netanyahu and Finance Minister Yuval Steinitz have been unmoved by criticism from Bank of Israel Governor Stanley Fischer over their plan to raise the 2013 budget deficit. At Sunday's cabinet meeting, government ministers are expected to approve a bill to increase the deficit target from 1.5% to 3%.

In a speech Thursday at the Caesarea Economic Policy Planning Forum, Fischer called for a budget deficit of 2.5%, adding that such a policy would "send a message that the budget was under control and that we intend to conduct ourselves as a responsible, orderly country like Finland and not like the weaker countries in Europe."

The increase of the deficit next year to 3%, which is also opposed by Gal Hershkovitz, the head of the Finance Ministry's budgets division and by the ministry's accountant general, Michal Abadi-Boiangiu, would boost the deficit in next year's budget from NIS 14.3 billion to NIS 28.5 billion. A majority of the cabinet is expected to vote in favor of the move.

Although Fischer's speech was not welcomed in the Prime Minister's Office, Netanyahu is thought to hold a very high regard for the central bank governor and his views. Ironically, Fischer's admonitions could be used by the prime minister to help rein in the budget demands of the various ministries.

Steinitz's bill, if passed by the Knesset, would amend 2010 legislation that set the 2013 target at 1.5% and the 2014 deficit target at 1.0% of the country's gross national product. Steinitz's amendment would call for a 2014 budget deficit of under 3% and would set a 2015 target smaller than 2014's. It would limit the 2016 deficit to a maximum of 2.0%. It would set a deficit target of 1.5% by 2019.

Israel faring better than elsewhere in West

The Finance Ministry noted that Israel's 2011 and 2012 budget deficits are below those that most Western countries - including the United States, Britain, France and Spain - have been running. Germany is the only major Western country with a lower budget deficit than Israel's. Israel is also the only country for which the Standard & Poor's rating agency raised its rating this past year (to A + ).

The treasury is projecting rates of growth in Israel - 3.2% this year, 3.5% for 2013 - that are higher than in the West in general. The treasury conditioned its growth projection here on a number of changes: that the economy function more efficiently, following structural changes; that barriers to employment be eliminated; legislative changes be made; and that there be a substantial growth in the workforce, particularly through the increased entry into the labor force of ultra-Orthodox men and Arab women.

Budget planners have not only had to look at expanding government spending; tax collection revenues have not met expected levels. They are therefore looking not only at the spending side but also in boosting tax revenue through tax increases. (See diagram. )

Netanyahu and Steinitz are nonetheless seeking to soften the blow to the public next year, an election year. They are also said to be concerned that draconian budget measures would fuel the social protest movement this summer.