Treasury Brass Tells Kahlon He Faces $4 Billion Hole in Israel's 2017 Budget

But Finance Minister Kahlon vows to step up spending to narrow social gaps

Finance Minister Moshe Kahlon walks past a giant projection of the Israeli flag.
Marc Israel Sellem

Finance Minister Moshe Kahlon learned at a preliminary meeting on the 2017-18 state budget on Monday that he faces a 15 billion shekel ($3.9 billion) fiscal hole in the first year of the two-year budget, because of spending commitments made to coalition partners after last year’s general election.

In a speech at the Netanya Academic College on Monday night, Kahlon acknowledged the problem but vowed to increase spending next year, although a sharp drop in economic growth in the first quarter may complicate matters further it the economy doesn’t pick up in the coming quarters.

“We are short of money, but we’ll cope using efficiency measures and proper fiscal management,” Kahlon said. “In the next budget I am committed to significant [spending] increases for civilian ministries. Social gaps have to be reduced. We will design a serious package of measures for economic growth and exports and won’t hesitate to lower taxes to do so. Additional money for health, public transportation and education is a minimum, not the maximum.”

The meeting of top treasury officials came less than a week after Kahlon and Prime Minister Benjamin Netanyahu agreed on a controversial two-year budget. Treasury officials prefer a one-year budget because it gives them more flexibility to adjust fiscal policy to changing economic conditions, but Netanyahu hopes to avoid threats to his narrow coalition by halving the number of budget debates in the cabinet and Knesset over the next two years.

Although tax collection has been far ahead of projections this year, on Monday the Central Bureau of Statistics said gross domestic product grew at a tepid 0.8% rate in the first quarter as exports fell. For 2017, the treasury is forecasting 2.9% growth, including a 3% increase in exports, which would generate tax revenue of 290 billion shekels and leave the budget with a deficit equal to 2.5% of GDP, down from a targeted 2.9% this year.

For 2018, treasury officials said tax revenues would grow to 305 billion shekels, with the deficit narrowing to just 2% or 2.25% of GDP.

The tax-revenue forecast is a big jump from the 270 billion shekels collected in 2015 and the 277.9 billion shekels projected for this year, but officials said they were confident their estimates were realistic.

The 15-billion-shekel hole is mainly due to spending promises Netanyahu made last year to lure the ultra-Orthodox United Torah Judaism and Shas parties, as well as Naftali Bennett’s Habayit Hayehudi, into the coalition.

Another major spending increase is the additional 3.65 billion shekels slated for defense, including 350 million shekels to covering the cost of moving army installations to the Negev under a multiyear plan. Under an agreement reached between Netanyahu and Defense Minister Moshe Ya’alon, the army is to receive a similar increase in 2018, they noted.

Over 2017-18, the Health Ministry will be getting 2.5 billion shekels in additional appropriations, most of it for strengthening the public health sector. The Transportation Ministry is due to get a similarly sized increase.

Education will get an extra 1.25 billion shekels and housing another 1 billion shekels while the Social Affairs Ministry and the National Insurance Institute will get 1.6 billion shekels more, including aid for Holocaust survivors.