How Israel's Budget Swelled by $1.05 Billion Overnight

In a marathon cabinet meeting that ended at dawn, the finance minister agreed to boost spending by almost double the legal limit.

Moshe Kahlon and Benjamin Netanyahu, August 14, 2016.
Emil Salman

When the cabinet began its deliberations over the 2017-18 budget last Thursday, treasury officials had already conceded that spending would be far in excess of the legal limit of 2.7%. The budget called for spending to grow 4.1% next year alone.

Eighteen hours later, at seven in the morning Friday, when the ministers voted unanimously in favor of the package, Finance Ministry officials discovered that spending for next year would be rising 5.2%, nearly double the legal ceiling.

Over the course of the discussions, Finance Minister Moshe Kahlon promised his fellow cabinet members 4 billion shekels ($1.05 billion) in extra spending not included in the original package in each of the next two years.

Officials described the overnight cabinet meeting as an oriental bizarre unique to the Israeli budget-making process. “The right hand is adding money to the budgets of the ministries while the left hand is cutting those same budgets for the ministries on an across-the-board basis, which everyone knows make no economic sense,” said one treasury official, who asked not to be identified.

He was referring to the Finance Ministry’s plans on the evening of the budget deliberations to impose an across-the-board reduction in ministry budgets of 2%, or 2 billion shekels, annually. That was supposed to help stem the fiscal deficit of 2.9% of gross domestic product and help pay for personal and corporate income tax cuts Kahlon promised.

Across-the-board spending cuts are easy to impose but they discredit claims that the treasury has control over spending priorities when the fiscal pain is being distributed with no aforethought.

In any case, with the added spending Kahlon agreed to Thursday night, the across-the-board cut will now have to increase to 4.5% for another 2.5 billion shekels in annual savings, said Amir Levy, the treasury budget chief.

Other treasury sources said it was unclear how the rest of Kahlon’s concessions would be funded. At the beginning of the process, when the bill was in the range of 2 billion shekels, officials were optimistic about covering the added costs, but the 8 billion-shekel figure is a different story.

Already in June, Kahlon and Prime Minister Benjamin Netanyahu agreed that the deficit target would be widened to 2.9% in each of the next two years from original targets 2.5% in 2017 and 2.25% in 2018. A further widening of the deficit would be risky.

The Finance Ministry has so far refused to divulge who got what. But estimates are that the biggest beneficiary is the Education Ministry, which received 4.7 billion shekels to build an additional 17,000 classrooms – a major achievement for the ministry’s top brass since Education Minister Naftali Bennett, who was abroad, didn’t personally lobby for his ministry at the cabinet meeting.

The Welfare Ministry is getting an extra 2.01 billion shekels and its minister, Haim Katz, claimed he was exempted from the across-the-board spending cut. The Health Ministry, whose boss Yaakov Litzman, was threatening to vote against the budget, is getting another 1.5 billion over the next three years for the healthcare basket (services and medications subsidized by the government) and for dental care.

Other major beneficiaries were the Interior Ministry, which won an extra 2 billion over two years, and the Agriculture Ministry that received 1 billion.

Kahlon and Netanyahu both promised at the meeting that the budget would provide a host of benefits for Israelis. “This is an important budget, containing the foundations for competition, reform and growth, a lower cost of living and reducing the [income] gaps, which is an important goal of ours,” the prime minister said after the meeting.

However, the bottom line is that the 2017-18 budget isn’t very different from the spending packages that preceded it.