Netanayhu's Plan: Cuts in Defense, Health, Education and Welfare

Prime-Minister designate Benjamin Netanyahu plans to cut at least NIS 8 billion from government spending in 2009.

Prime-Minister designate Benjamin Netanyahu plans to cut at least NIS 8 billion from government spending in 2009 from the budget originally approved by Ehud Olmert's cabinet in August. The cuts will keep spending in line with the planned 1.7% increase from the 2008 budget, say Netanyahu confidants.

The lion's share of the cuts will come from the defense budget, with others coming from education, health and welfare.

Netanyahu does not want to exceed the spending framework for 2009 of NIS 313.3 billion approved last summer by the cabinet. This figure was based on a 1.7% increase in per-capita spending for this year.

As opposed to a number of his future coalition partners, Netanyahu's aides say he thinks limiting spending was the correct decision, and attempts by Labor and others to increase government spending by 2.5% were a mistake.

Since the cabinet approved the proposed 2009 budget, which has yet to be approved by the Knesset because of the elections, much has changed. Various spending commitments have added NIS 8 billion-NIS 10 billion. This means Netanyahu will have to find a similar amount in cuts, though his economic advisers are speaking of only NIS 6 billion-NIS 7 billion in cuts.

The increased spending includes another NIS 2.45 billion promised by Olmert to the defense establishment for the cost of Operation Cast Lead in Gaza, and defense is demanding even more; money for the Finance Ministry's economic plan to fight the recession, NIS 6 billion at least; and various payments Netanyahu will have to make to his partners as part of the coalition agreements, estimated at the very least to be NIS 1 billion.

The other side of the equation, and other major problem, is the steep drop in tax revenues. The treasury now forecasts a NIS 40 billion shortfall in tax collections from the basis of the original 2009 budget, some 5%-6% of GDP.

If the steep decline in tax revenues continues, to keep within the spending framework Netanyahu will be forced to increase taxes already in 2009, by canceling various tax breaks. The total amount of tax credits budgeted for 2009 is NIS 39.2 billion, about 25% of tax revenues forecast for this year.

Netanyahu's first target is the tax exemption on advanced training funds (kranot hishtalmut), which is now the only remaining savings vehicle with tax breaks that is not for retirement savings. This break costs the treasury NIS 3.7 billion a year in lost revenue. Another tax break targeted is the exemption from VAT in Eilat. Netanyahu does not, however, plan to reduce tax benefits for retirement savings.

Other proposals for raising taxes include increasing VAT by 1%.

Netanyahu's big problem in implementing his plans is Histadrut labor federation chairman Ofer Eini, who strongly opposes any cut in benefits for the training funds.

Over the past 13 years, the Histadrut has headed off no less than six attempts to do away with or significantly reduce the tax breaks on the funds. Each time the Finance Ministry has backed down in the face of fierce opposition from organized labor. The last time was in 2008.