Takeaways From Israel's 2019 Draft Budget

The 479 billion-shekel package reduces spending to pay for finance minister's Net programs

Finance Minister Moshe Kahlon at the Knesset, June 19, 2017.
Olivier Fitoussi

The 2019 budget, which the treasury released to the public on Monday, is a 479 billion shekel ($139 billion) affair that contains more than 10 billion shekels in spending cuts and increases in the deficit to pay for Finance Minister Moshe Kahlons Net programs.

Those programs include Family Net, which offers a package of tax breaks and subsidized afternoon programs for middle class consumers, and Industry Net, which provides 1.15 billion shekels in aid to industry to make it more innovative. Even with the spending cuts and increase in the deficit of 2.9% of gross domestic product, the budget still ends up violating the spending-growth formula by some 3.4 billion shekels in 2019.

Here are four points about the spending package, which goes to the cabinet on Thursday for deliberations.

1. Kahlon made a political decision to squeeze 1.2 billion shekels of the projected savings by yet again putting off implementation of a long school day. Governments have been doing that since the legislation on the long school day passed in 1997, but this time around the savings are going to help fund the 605 million shekels in subsidies for childrens afternoon programs.

Logically, it would have made more sense to have a long school day instead of a subsidized afternoon program, but politically its much more attractive to spend money on a new initiative than to finally put into effect some musty old law.

2. After a series of tax cuts, the 2019 budget reverses gear and calls for 600 million shekels in higher taxes on the most polluting energy sources, namely coal and coke. Theres also a smaller rise planned in the tax on clean natural gas. The tax on dirty fuels should be welcomed as a way of discouraging industrialists and power companies from using them, but it will also mean higher prices for electricity consumers and for construction because coke is used to power cement plants.

3. Throughout the budget there are tiny cost-cutting measures, such as 40 million shekels to be slashed from the Foreign Ministry and 3 million shekels from the Labor and Welfare Ministry budget for trips abroad. No doubt that second item is a waste of taxpayers money, but the treasury should be asking itself whether it really needs to drill down to that level of micro-management of ministerial budgets. The budget division would do better to make a general cut and let each ministry decide where to apply it.

4. The budget deficit is slated to fall to 1.5% of GDP in 2024, but its hard to believe that will ever happen. In 2019, the deficit was supposed to be 2.5% and in the end will be 2.9%. If the government cant keep to its deficit in a good year, like 2017 when tax revenues and the economy were growing, the treasury budget planners have to be unreasonably optimistic that it will manage it in 2024.