Treasury Calls for Big Spending Cuts, Tax Hikes in 2013 Budget Proposal

Move cames after a bitter internal debate and against the backdrop of the slowing Israeli economy and the global financial crisis.

The Finance Ministry presented a 2013 budget proposal to Prime Minster Benjamin Netanyahu on Sunday, recommending major spending cuts and tax increases to levels not seen in recent years.

The move came after a bitter internal debate and against the backdrop of the slowing Israeli economy and the global financial crisis.

According to the head of the ministry's budget division, Gal Hershkovitz, the government had no choice but to opt for the tough new measures.

An early draft of the 2013 budget in 2010 provided for a 2.9% increase in expenses next year over this year, but this would not cover spending increases due to an automatic budget mechanism based in part on population growth. It also would not cover government decisions such as the funding of the Trajtenberg committee's recommendations on lowering the cost of living.

The treasury believes that the spending increase will require other cuts of between NIS 10 billion and NIS 12 billion. This would involve, for example, a modest increase in defense spending and force defense officials to forgo some of their requests. It would also defer some of the Trajtenberg committee's recommendations. (See diagram ).

On the income side, problems abound. The 2012 budget was based on optimistic assumptions that state revenue would come to NIS 232.2 billion this year. The ministry recently admitted that this assumption was mistaken and cut the projection to NIS 221 billion. But now even that forecast appears optimistic and could result in a wider deficit.

Next year's spending provisions are based on expected revenue in 2013, based on estimates made this month. It appears the shortfall in next year's revenue will amount to between NIS 10 billion and NIS 12 billion.

The Finance Ministry's budget department has proposed that the situation be addressed by allowing the deficit to rise to at least 3% of gross domestic product, as opposed to the current 1.5% target. This would allow for an addition of NIS 14 billion to the budget and leave a deficit of NIS 16 billion.

Finance Minister Yuval Steinitz told Netanyahu on Sunday that the budget would be for one year rather than the two-year budgets that Steinitz normally favors. Steinitz said he made this decision because Knesset elections must be held next year.

He said it was not inappropriate for the 2014 budget to be set by the current government. He recommended that legislation be passed to require a two-year budget for 2014-2015. One-year budgets would be reserved for election years.

The entire senior staff at the ministry has been pushing for a one-year budget for next year - also because tough measures are needed at a time of uncertainty in Israel and abroad.

Senior Finance Ministry sources have said recently that Netanyahu's broad national unity government should be able to pass the tough provisions with relative ease. They said it was preferable to make cuts in specific budget provisions rather than across-the-board cuts at all ministries.

Netanyahu, who received an initial report on the budget last week from his bureau chief, Harel Locker, is expected to make comments on the draft budget and request modifications. A second meeting between the Finance Ministry and Prime Minister's Office could revisit the provisions as early as next week.

The budget and accompanying Economic Arrangements Bill will be submitted to the cabinet in four sessions beginning in late June and ending in mid-August. The legislation will then go to the Knesset after the fall Jewish holidays. It is expected to pass by a large majority in late December.