Steinitz Unveils 2-year Budget and It Isn't Friendly to the Poorer Echelons

Proposal to increase tax on gasoline by 20 agorot per liter in 2011 and another 20 agorot per liter in 2012; tax increase on coal is expected to boost electricity rates.

Despite earlier promises that the two-year budget for 2011 and 2012 would bring good news, it has also brought cuts. A budget outline was presented at a press conference in Tel Aviv yesterday, with the cabinet set to consider it in just over a week.

Udi Nissan, Yuval Steinitz and Haim Shani
David Bachar

While the 2011 budget may, under law, be 2.66% greater than the 2010 budget, there's a snag - known as the "automatic pilot." The snag here is that various bills and sheer population growth have caused the 2011 budget to grow more than 2.66% larger than the 2010 budget, meaning cuts are needed.

The proposal presented yesterday by Finance Minister Yuval Steinitz and his ministry chiefs would increase tax on gasoline by 20 agorot per liter in 2011 and another 20 agorot per liter in 2012, while a tax increase on coal is expected to boost electricity rates. The budget also spells bad news for real estate purchasing groups: they'll pay the same tax as all home buyers.

Value added tax, which Prime Minister Benjamin Netanyahu and Steinitz had promised to lower from 16% to 15.5%, will remain as is.

The treasury intends to jack up royalties paid to the state by communications companies from 1% to 2% next year, and from 2% to 2.5% in 2012. That measure is expected to raise an additional NIS 400 million. A revision of child allowances has been deferred from 2011 to 2012, while old-age allowance and other National Insurance payments will not be adjusted to the extent initially planned.

The Finance Ministry is also seeking NIS 1.4 billion in cuts in the defense budget for each of the next two years, adding that if the cabinet doesn't go along with this, the same cuts would be applied to the education, health and social affairs ministries.

Steinitz, who has been engaged in futile negotiations with the prime minister and with Defense Minister Ehud Barak on defense cuts, said: "There are no easy budgets and the new two-year budget was also complicated and difficult to prepare."

The proposal is the right budget under current circumstances, he said, explaining it provides for a measured, 2.66% increase in spending next year and another 2.66% increase in 2012. He warned that uncontrolled government spending would mean a fate for Israel similar to that experienced in Spain or Ireland.

Steinitz said defense spending had grown 30% over the past five years, a much steeper increase than funding for other ministries, and which came on top of the NIS 10.65 billion the Defense Ministry received to finance the Second Lebanon War and Operation Cast Lead in Gaza.

Steinitz said the challenges facing the economy in the next two years include maintaining the stability of the financial system, raising relative per capita GDP compared to other countries, strengthening weak segments of the population and reducing social disparities. Among the strengths of the Israeli economy, he said, are a tradition of structural reform and responsible fiscal policy, an impressive record in dealing with economic shocks, a fiscal policy that encourages growth, high levels of spending on research and development, and a high level of human capital.

On the negative side, Steinitz noted an erosion in human capital and knowledge-based industry along with a decline in the country's international competitiveness, declines in education and employment, problems related to the delivery of services to individuals and businesses, and disparities in infrastructure.

Finance Ministry Director General Haim Shani said the proposed two-year budget would give priority to high-tech industry, which represents 15% of economic output, as well as higher education, export-based industry and industry in the outlying areas of the country.

The Finance Ministry's budget director, Udi Nissan, said NIS 264.7 billion was being budgeted for 2011 and NIS 271.7 billion for 2012. The ministry is projecting economic growth of 3.8% next year and 4% the year after. It has set a maximum deficit of NIS 25.9 billion for 2011, or 3% of GDP, and NIS 18.3 billion the year after, representing 2% of GDP.

Automatic pilot

The automatic pilot, which allows the budget to rise to accommodate population increases and legislation, will adds NIS 12 billion to the 2010 budget - of which the largest proportion, NIS 3.4 billion, is allocated for defense.

Nissan said, however, that the treasury is asking the defense establishment to forgo NIS 1.4 billion of the NIS 3.4 billion in the 2011 budget. He also noted that the defense establishment is not meeting the 10-year NIS 30 billion savings target the Brodet Commission set for it over 10 years.