Fiscal Warning / When the Going Gets Tough, Netanyahu Delays

Without the 2013 budget, efforts to cope with an increasingly difficult economic environment will end up being delayed until after elections.

Fitch, one of the big three global credit rating firms, gave a warning signal this week to Israel's decision makers. In an analysis it published on Wednesday, it said the deficit targets set by the government for this year and next are not realistic, and that Israel's sovereign credit rating - which is now an A with a stable outlook - is likely to fall if Israel's target for debt as a percentage of gross domestic product rises from the current 74%.

Last Independence Day even Fitch affirmed Israel's A credit rating, a level it originally assigned in February 2008. Finance Minister Yuval Steinitz wasn't happy and pressured the company to raise Israel to an A+.

Since then the Israeli economy has taken its hits. Today, Steinitz would happily accept his A rating.

The timing of the Fitch report is interesting because it was published the same week the cabinet approved budget cutbacks and ordered NIS 3 billion in tax increases, all aimed at ensuring that the budget meets its deficit target of 3.4% of GDP. At things look now, that target is achievable, but it is not enough because around the corner lurks 2013.

Fitch is correct when it says Israel will be challenged to reach its 2013 deficit target of 3%, or NIS 29 billion. The treasury agrees and so does the Prime Minister's Office. That would change if the government can approve next year's budget before the end of December because that improves the chances of meeting the target and the debt-to-GDP ratio.

The problem is that if will demand giant budget cuts of NIS 13 billion to NIS 15 billion as well, it seems, as more tax hikes to raise NIS 3 billion to NIS 4 billion in revenue. Prime Minister Benjamin Netanyahu simply doesn't know how to cope with numbers like these, especially not in an election year.

Developments already are worrisome. This government was the first in decades not to begin deliberations over the next year's budget in July. Treasury officials justifiably say it is up to Netanyahu to move ahead with the budget process. But apparently he has made no decision, or at least hasn't announced it.

But Netanyahu doesn't have a lot of time. By the middle of October, the budget and arrangements laws must be brought to the Knesset for its final reading. Without the 2013 budget, efforts to cope with an increasingly difficult economic environment will end up being delayed until after elections. But every delay comes at a cost to the economy.

Making such enormous cuts will not be easy - and they will have to encompass the two biggest-spending ministries of them all, defense and education. NIS 13 billion in spending cuts can't be done without these two sharing the pain.

At the treasury they are already working up fiscal alternatives, with the aim of ensuring economic growth and narrowing social gaps by focusing on three things: education, employment and infrastructure. Defense isn't on the list, but then the budget planners have gotten no contrary signal from Netanyahu, or none yet.