Financial Crisis Plan Pits Defense vs. Social Reform

A Finance Ministry plan to address the economic troubles forecast for 2012 would make slicing the defense budget a condition for implementing some of the Trajtenberg committee's plans for social and economic reforms.

The committee, appointed by Prime Minister Benjamin Netanyahu and led by Prof. Manuel Trajtenberg, came up with a list of proposals designed to ease the financial burden on the middle class in the wake of this summer's widespread cost-of-living protests.

Trajtenberg and Netanyahu - Avi Ohayon / Prime Minister’s Bureau - October 2011
Avi Ohayon / Prime Minister’s Bureau

However, the year 2012 is shaping up as a difficult one. The euro bloc nations are still mired in a debt crisis, and signs indicate that the 2008-2009 recession may be a double-dip one - meaning that the economy may be heading into a second recession, despite the improvement since the nadir of the last one.

In keeping with the forecasts, the Finance Ministry is drafting a contingency plan for addressing an economic crisis even worse than that of 2008-2009. This includes both a list of stimulus measures, based in part on those from the last crisis, as well as policy principles.

The main such principle is that the government must not overspend its budget at any price. Any lack of financial discipline will be perceived as particularly grave given the environment predicted for 2012, and will make it commensurately more difficult for Israel to borrow money on international markets and possibly even undermine Israel's financial stability, believes the ministry.

The ministry is willing to consider letting the government overspend the budget only if the crisis is particularly bad and additional stimulus plans are needed.

This means that the government will need to cut NIS 1.5 billion from the existing budget in order to fund unexpected expenses such as the new wage agreement with the doctors and an increase in minimum wage.

This also means that the Finance Ministry will flat out reject Defense Minister Ehud Barak's call to increase the state budget. Barak had suggested doing so in order to fund the Trajtenberg proposals while increasing his own ministry's budget.

Thus, the implementation of the Trajtenberg Report's main components, which include free public education starting at age 3, expanded public daycare, and measures involving housing and the ultra-Orthodox, will be contingent on the government backing a plan to cut NIS 3 billion from the defense budget. If it does not, there will be no alternative funding sources.

Senior government sources believe that Netanyahu will announce soon that he is shelving that plan, which is part of a larger plan to trim NIS 15 billion from the defense budget over the next five years.

The proposed budget cut will be deliberated in a week or two as part of a discussion on funding sources for implementing the Trajtenberg recommendations.

Finance Ministry sources, who have long called for cutting the defense budget, reportedly expect to lose the battle due to Netanyahu's tight relationship with Barak. However, they cannot say whether Netanyahu will drop the entire NIS 3 billion cut, or call for a smaller cut instead.