Kahlon Agrees to Spend More in Bid to Win Support for Budget

Netanyahu lauds package, but Bank of Israel chief faults key terms, health minister says he’ll vote against it.

Finance Minister Moshe Kahlon agreed to some 2 billion shekels ($520 million) in extra spending to win support from ministers as the cabinet met late into last night before voting on the 2017-18 budget.

Sources said the cabinet was expected to approve the measure by a big majority, but at least one cabinet member, Health Minister Yacov Litzman, said he would vote against the spending package over its failing to allocate enough to the healthcare system.

Prime Minister Benjamin Netanyahu lauded the budget at the start of the deliberations yesterday, saying tax cuts and plans to trim regulations would lead to growth and investment. “The state budget for 2017-18 will encourage growth, increase competition and lower the cost of living,” he said.

But Bank of Israel Governor Karnit Flug sharply criticized its spending and deficit targets. Shraga Brosh, president of the Manufacturers Association, said it contained nothing helpful to business and decried it as “populist headlines” that will raise the cost of doing business.

The package – which Netanyahu has pushed for as a way of consolidating two years of coalition-endangering budget debates into one – calls for 454.1 billion-shekel of spending in 2017 and 436.6 billion in 2018. The budget and the accompanying Budget Arrangements Law will go to the Knesset at the end of October for approval.

Finance Minister Moshe Kahlon faces a difficult fiscal balancing act. One the one side, he has promised to step up spending for defense, education, health and transportation, but on the other chose to reduce corporate and personal income taxes by 2 billion shekels.

Kahlon also has to contend with 9 billion shekels in budget commitments Netanyahu made when he formed the coalition last year. Yesterday Kahlon made further concessions, promising some 2 billion shekels in extra appropriations during the meeting, which treasury official said they had no revenue sources or spending cuts with which to cover, although it may come from increasing the planned across-the-board cuts.

The size of the concessions was unusually large at this stage of the budget process.

Among the big winners was Culture and Sports Minister Miri Regev, who won an extra 455 million shekels over the next two years for her ministry. Science, Technology and Space Minister Ofir Akunis won a 15% increase in his budget to 480 million shekels in 2017 and 530 million in 2018.

Social Equality Minister Gila Gamliel will see her budget grow by 650 million shekels over the next two years. Energy Ministry got 140 million shekels annually for each of the next two years plus another 360 million to improve and expand the national gas pipeline network.

But Litzman, whose Health Ministry was due to get an extra 32.5 billion shekels in 2017, said he would vote against the spending package after talks with the Finance Ministry yesterday failed to reach any agreement.

Litzman said the increased spending failed to meet the health needs of Israel’s aging population. He spoke as doctors at government hospitals staged a 24-hour strike over conditions and inadequate budgets.

“The treasury’s proposal provides no answer to the most basic needs of the healthcare system in the coming years,” Litzman said.

To balance the books, the budget calls for increasing the targeted deficit ceiling for the next two years to 2.9% of gross domestic product from 2.2% last year. The treasury also plans a 2% across-the-board cut in ministry spending, putting off civil servant pay raises and taking money from quasi-government groups. Other taxes – including people getting big pensions and owners of multiple homes – are being raised.

At yesterday’s cabinet meeting, Kahlon took issue with critics who termed the budget populistic and risky. “We are continuing the policy of lowering taxes because low taxes enable the economy to grow and will enable us to increase civilian spending,” he said, echoing the prime minister’s reasoning. “All the steps we’re taking are being done responsibly and carefully.”

However, Flug, echoing a Bank of Israel report on the budget released earlier in the week, took issue with some of the budget’s main features. In particular, she scored the decision to raise the budget deficit at a time when tax revenues are rising, saying it exposed the government to bigger risks if and when trends reverse.

“The new deficit target is expected to lead to a moderate but prolonged increase in the debt-to-GDP ratio in the next few years, and exposes the economy to the risk of a significant increase in the deficit and in the debt-to-GDP ratio if macroeconomic developments are less positive, even slightly, than those that appear in the base scenario of the forecast upon which the budget was constructed,” in remarks released by the central bank.

Although the Israeli economy has slowed this year, tax collections have continued to rise sharply, leaving the government with more revenues that it had expected as well as a much lower budget deficit. The deficit-to-GDP and debt-to-GDP ratios are key barometers of fiscal performance policy makers and the financial markets.