Netanyahu Blocks Vote on Budget Reserves in Bid to Use Them for Defense

Cabinet vote on directing funds to reduce deficit delayed, as treasury report puts fiscal pressure on Finance Minister Kahlon ahead of election

File photo: Israeli Prime Minister Benjamin Netanyahu (center) during his weekly cabinet meeting in Jerusalem, January 13, 2019.
Ariel Schalit/AP

Prime Minister Benjamin Netanyahu hinted Sunday at plans to increase the defense budget substantially when he blocked a cabinet vote to use some 1.5 billion shekels ($410 million) in reserves from 2019 to reduce the projected deficit.

Netanyahu, who also serves as defense minister, delayed the vote, saying he wanted to wait until after discussion of giving the army a budget supplement to meet what he called the growing security threats Israel faces.

The remark comes five months after Netanyahu called for sizable long-term increases in the military budget over the next decade, starting in 2019. The plan, called “Security Concept 2030,” could increase allocations by as much as 4 billion shekels by tying defense spending to the size of the economy.

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The vote on the reserves was brought to the cabinet by a reluctant Finance Minister Moshe Kahlon, who is coping with fiscal pressures just as the election campaign is starting up. Those problems were highlighted Sunday by treasury projections showing the 2019 budget deficit could reach 3.6% versus legally mandated 2.9% due to a forecast slowdown in economic growth.

Last week, the treasury revised down its 2019 growth forecast to 3.1% from 3.4% amid expectations that consumer spending, investment and exports will also slow.

A rising budget deficit combined with the government’s failure to address it threatens to undermine Israel’s hard-won reputation for fiscal rectitude and lower its international credit rating. Taking the 1.5 billion shekels from the reserves would cut the deficit 0.1 percentage point.

File photo: Israeli Finance Minister Moshe Kahlon speaks during the swearing in ceremony of Bank of Israel governor, Jerusalem, December 24, 2018.
Amir Cohen/Reuters

Normally the finance minister presents the budget forecast to the cabinet on June 1, which Kahlon would have been ready to do. But officials at the finance and justice ministries pressured him to present it now due to what Asi Messing, the treasury’s legal adviser, said were “concrete deviations” from fiscal targets.

Netanyahu expressed skepticism about the timing, saying, “It’s an interesting question why they are presenting this to us now.”

Netanyahu’s chief economic adviser, Prof. Avi Simhon, took issue with the treasury’s forecast, contending that Israel’s economy is in better shape than the ministry’s estimates show. Nevertheless, the cabinet approved the treasury outlook.

The delay in the cabinet’s vote on how to use the reserves won’t have an operative effect because ministries aren’t authorized to spend the money unilaterally. However, treasury officials are concerned that politicians would be tempted to exploit it, especially ahead of Israel’s April 9 general election.

Prof. Michel Strawczynski, the head of research at the Bank of Israel, hinted at the problem at the meeting.

“In view of the expected deficit level, it is important that the current government avoid making any decisions that will increase the deficit any further this year,” he said in a summary of his remarks issued by the central bank.

Noting that economists expect “marked deviations” from the budget targets for 2020-22, he said, “This makes it even more necessary to avoid deficit-expanding measures until the formation of the new government, in relation to the years following 2019 as well.”

The Deficit Reduction and Fiscal Spending Limits Law creates a legally mandated pathway for reducing the budget deficit over the years and inspire confidence that even when the government breaks the rules it is committed over the longer term to meeting the targets. The law says the deficit should be no more than 2.5% in 2020 and 2.25% in 2021 and 1.5% after 2024.

Netanyahu’s preference is to use the 2019 reserves for defense while Kahlon — whose Kulanu party is faring poorly in the polls — is more inclined to use it to pay for additional tax cuts or to head off price hikes for government services or products. The 2019 budget explicitly states that the reserves known as “adjustment reserves” should be used to close any gaps in income or expenses versus budget targets.