Finance Minister Kahlon May Have New Budget Ally in Bank of Israel Governor Flug

Still, cuts slated for 2019 spending package are already sparking opposition inside coalition

Finance Minister Moshe Kahlon, November 26, 2017.
Emil Salman

Finance Minister Moshe Kahlon faces an uphill battle over the 2019 state budget, which will be presented to the cabinet for the first time Thursday. But support has come from an unexpected quarter.

In a meeting last week with Prime Minister Benjamin Netanyahu and Kahlon, Bank of Israel Governor Karnit Flug proposed that the three-year old formula for curbing fiscal spending be revised or even eliminated.

The formula ties budget growth to the forecast population growth and the target debt to gross domestic product ratio. Flug, the rule’s strongest advocate, noted that the government has broken it repeatedly and it likely to do so again in the 2019 budget.

Flug’s new position aligns her with Kahlon, who wants more social spending. Netanyahu, who tends to take a harder fiscal line, reportedly didn’t oppose the idea.

The 2019 budget is already slated to be 3.4 billion shekels ($990 million) over the limit set by the formula. But allowing that excess won’t cover all the costs of Kahlon’s programs, including the Net Family Net program of tax cuts and spending, Net Industry (see story on this page), increased disability allowances and reforms to long-term care insurance.

To help close the gap, the treasury last week released plans for 10.5 billion shekels in tax cuts, all of which are expected to ignite opposition from inside the coalition.

The budget division, for instance, wants to take half of the 1.6 billion shekel surplus in an Environmental Protection Ministry shoreline, recycling and anti-dumping fund.

Environmental Protection Minster Zeev Elkin has come out against the raid on his fund, calling it a “scandalous” misuse of its purpose. A host of environmental organizations have vowed to petition the attorney general to block any such move and, if necessary, the High Court of Justice.

Local governments that make use of the fund are also expected to oppose any attempts to dip into it.

Elkin will also be on the front lines battling a Finance Ministry initiative to eliminate, at a savings of 200 million shekels, a handful of minor government ministries including the Jerusalem Affairs and Heritage Ministry, whose portfolio Elkin holds in addition to that of environmental protection.

Others on the hit list are the Intelligence Affairs Ministry, which Transportation Minister Yisrael Katz heads, and the Strategic Affairs Ministr, which is led by Public Security Minister Gilad Erdan.

Elkin has said that treasury officials have told him the Jerusalem ministry will be excluded in the end, but if not he and the other ministers are expected to fight to keep their ministries intact.

Another battleground will be over the treasury’s plans to cut 20% of the staff at the Foreign Ministry’s Jerusalem headquarters, arguing that too many diplomats are working in Israel and that it amounts to hidden unemployment.

Hanan Godar, who heads the ministry’s workers’ committee, has already announced that the union will fight any layoffs.

Opposition is also expected to a plan to coordinate relations between the government National Insurance Institute and private insurers, aimed at saving the state 1 billion shekels a year, and proposed changes to defense spending. On the latter, the treasury is saying there will be no budget supplements in 2019, but the Defense Ministry says the issue is still under discussion.