Finance Ministry Planning Massive Budget Cuts for Defense, Education

Cuts are direct result of coalition agreements; ultra-Orthodox yeshiva, school budget won't be harmed.

The Finance Ministry is preparing plans for massive budget cuts in 2009 in the face of an enormous budget deficit, which is the reult of both a steep drop in tax revenues and the promises made to the parties in the new government coalition.

Two ministries are expected to be hit the hardest: education and defense. The Finance Ministry wants to cut NIS 2-NIS 3 billion from the defense budget this year. Paradoxically, the cuts in the two ministries are the direct result of the coalition agreements. The agreement with the Labor Party specifically discusses the defense budget: "The proposed defense budget will be formulated after consultations between the prime minister and defense minister, in light of the challenges facing the State of Israel and with an effort to reach agreement."

But if Ehud Barak intended to make the defense budget part of the coalition bargaining, he failed and achieved exactly the opposite. The Finance Ministry's interpretation of the clause means the defense budget is open to discussion and will bear the brunt of the cuts.

Shas did not leave its budget demands open to interpretations of any kind, writing explicit numbers for the 2009 and 2010 budgets into its agreements, as well as unprecedented clauses stating that the budgets for its religious institutions and schools would not be cut.

In addition, the coalition agreement states that any unused budget amounts from 2009 will be carried over to 2010 - the only item in the entire state budget with such a condition.

This means that while the ultra-Orthodox yeshiva and school budget is guaranteed, the brunt of the cuts will then have to fall on the remaining general Education Ministry budget, as no party thought it important enough to include these funds in their demands.

"There is an economic price for building a coalition, but the economic cost of not establishing a government is so steep as to make the cost of forming the coalition tiny," said Prime Minister-designate Benjamin Netanyahu as he received the recommendations of his transition team, "the 100-day team," in the Knesset Thursday.

Netanyahu had asked the team to prepare a plan for the first 100 days of his new government, which will serve as the basis for the cabinet's main actions.

The team is headed by Likud MK Yuval Steinitz and includes MK Gilad Erdan (Likud), Netanyahu advisers Uzi Arad and Esti Appelbaum, businessman Izzy Tapuchi, attorney David Shimron and Ron Dermer.

The team's main recommendations include implementing the plan proposed by the chairman of the Israel Securities Authority, Prof. Zohar Goshen, to provide state guarantees for purchases of corporate bonds by institutional investors. The guarantees will cover 75%-80% of the capital. The plan is to help firms refinance and roll over their debts. The companies will be charged a fee for the guarantees.

The team was not overly enthusiastic about the treasury's leveraged investment funds, as money for this would come out of the state budget and not just take the form of future guarantees.

The team proposes providing state guarantees for banks to raise additional capital, which will allow them to provide more credit. Another recommendation is to issue more government bonds overseas, so as not to soak up local credit and leave it available for the private sector.

Other recommendations include state guarantees for government-owned infrastructure companies; removing bureaucratic barriers for large projects; rehabilitating the Tax Authority by adding more employees and improving its professionalism; and creating new investment funds to support small and medium-sized businesses.

To cut down on public spending, the team wants to require a majority 60 MKs for passing private-member bills costing over NIS 10 million.

The team also wants Netanyahu to continue with the scheduled tax reductions that will lower corporate taxes to only 20% in 2014, as well as cuts for individuals.

The budget deficits for 2009 and 2010 will be in the NIS 40 billion range in each of the two years, about 6% of GDP, the head of the Finance Ministry's Budgets Division, Ram Belinkov, said at a conference at the Hebrew University in Jerusalem on Wednesday.

This is the first time a senior treasury official has publicly said the economic crisis will not end this year and will carry over into 2010.

Belinkov said that beginning in 2011 the government will have to ensure the deficit gradually returns to its previous 1%-2% levels.

Unemployment will climb to 8.5% in the fourth quarter of the year, the deputy governor of the Bank of Israel, Prof. Zvi Eckstein, told the conference.

Eckstein called the current economic crisis the most serious in Israel's history, and said it will only end after U.S. and European economies recover, but he added that he expects those economies to start emerging from the crisis already this fall.

He also recommended the new government adopt the 2009 budget framework passed by the outgoing cabinet last August, and breech it only slightly, while setting a goal of reducing the debt to GDP ratio from the present 80% to only 60% by 2018.