Treasury: Budget Deficit Too Big to Raise Defense, Social Spending in 2013

PM Benjamin Netanyahu touts achievements on economic, education and security fronts.

1. Netanyahu goes on defensive

On Saturday night, Prime Minister Benjamin Netanyahu once again cut the taxes on gasoline. That did not prevent him from declaring, about 12 hours later, at the start of the weekly cabinet meeting: "Whoever says that it is possible to lower taxes and broaden expenditures without making an account lacks economic knowledge and is irresponsible."

Steinitz. Netanyahu
Olivier Fitoussi

"We need the taxes in order to purchase additional Iron Dome batteries, in order to complete work on the fence, in order to finance free education for children, in order to pave highways and build railways, in order to help the elderly and the needy," Netanyahu said.

These remarks were preceded by what could be interpreted as a defense of his government, as part of an effort to preempt a recurrence of last year's social protests. A hint of that protest was evident last night, when hundreds of banner-waving demonstrators took to the streets of Tel Aviv to protest the rise in gasoline and household electricity prices, and to call for Netanyahu to resign.

"Today, exactly, we will start the government's fourth year in office," the prime minister said to an audience that included five local schoolchildren from "the many hundreds who contacted me on Facebook," he explained.

Continuing with his defense, Netanyahu declared that this is the most stable government in the last 20 years and a government that gets things done - a lot of things, in his opinion.

"Israelis feel safer thanks to the government's vigorous security policy. They feel safer thanks to the major budgets we are investing in home front protection, with the emphasis on the purchase of Iron Dome batteries. Additionally, there is the security fence along the Sinai border and there are other actions that we are undertaking to increase security."

Shifting to the economic front, Netanyahu asserted: "Israelis also feel that the economy is more stable and secure. We have fared very well in the face of the global economic crisis. The economy here is growing despite the global crisis, and unemployment is at its lowest since 1983.

"There is nothing more 'social' than an economic policy that creates jobs. Jobs are the most social thing there is, and only someone who goes to the welfare office and has no income and no self-image before his family knows the effect of major unemployment."

The prime minister did not stop there.

"Growth has allowed the government to invest in all areas - highways, railways and interchanges," he continued. "We are investing great sums in order to draw the Galilee and the Negev closer to the center of the country. We are carrying out unprecedented revolutions in education - from preschool up to the NIS 7 billion we are investing in rehabilitating and advancing higher education. We are doing all of this in order to invest in the future."

Turning to the pressing issue of gasoline prices, Netanyahu said: "Last night, I decided - along with Finance Minister Yuval Steinitz - on a reduction in the price of gasoline that has been set by the global market. For the fourth time within a year, we lowered taxes on gasoline by the cumulative amount of NIS 0.80.

"I must point out that today, taxes on gasoline in Israel are smaller than in many European countries. I would like to make it clear: We do not control world gasoline prices. The price of gasoline is rising all over the world, in all countries. What we can do is to try and ease the burden on citizens in a responsible and measured way, and this is what we are doing. However, we are constantly maintaining the budgetary framework. Therefore, later this week, I will submit to the cabinet a proposal formulated by Finance Minister Steinitz to deal with maintaining that framework."

2. Netanyahu will decide

Gas prices are the perhaps the least of the headaches facing Steinitz, treasury officials - and, for that matter, Netanyahu and the cabinet as a whole. The Finance Ministry's big headache will deciding whether the next state budget - the one that is due to land on Netanyahu's desk in June - will cover two years, like the current one, or one year, like all its predecessors.

The two-year budget has a few advantages over the one-year model, but even more disadvantages. Amazingly, when high-ranking Finance Ministry officials are questioned over their preferences the answer is, "It's not our decision to make, it's the prime minister's, and he hasn't made it yet."

And when the same query is put to the staff of the Prime Minister's Office, the response is: "The prime minister has not yet made a decision. This will be done soon."

Steinitz also suffers from another sort of headache: the one caused by the anticipated deficit for the 2013 budget. In January the cabinet raised the deficit target for 2012 from 2% of GDP to 3.3% - an increase of around NIS 12 billion. Experts say it should have been hiked to 4%, or NIS 18 billion, but that would have raised the red flag in front of the credit rating agencies.

The rise in the budget deficit this year is a function of, among other factors, increased military spending, wage hikes and expenses resulting from implementing the Trajtenberg Committee recommendations, combined with the anticipated, and worrisome, decline in revenue from tax collection. The first harbinger of trouble on the latter front came in the first quarter of this year, when tax revenues undershot estimates considerably.

3. Taxes, up and down

As dismal as the picture is for the 2012 budget, the situation of the 2013 budget seems to be even more worrisome. The treasury will have to find an additional NIS 3.3 billion to fund the Trajtenberg recommendations, another NIS 2.2 billion for the wage hikes of physicians, nurses and state's attorneys, NIS 3 billion to NIS 4 billion more for defense and NIS 800 million more for contract workers.

Barring a miracle, the 2013 budget will have to entail deep, painful spending cuts together with higher taxes. No wonder the heavy hitters in the Finance Minister are saying it would be better to hold off on approving the 2013 budget until the end of 2012.