The Bottom Line / Spend It All, Fast

This time we have a tip for you, an actual recommendation. That is, if you're a top official at a ministry or any organization or association feeding off the state budget.

This time we have a tip for you, an actual recommendation. That is, if you're a top official at a ministry or any organization or association feeding off the state budget.

Do you have a procurement budget? A development and investment budget? Do you have any money left over for projects? Yes? Well don't hang around: Spend it. Every last shekel, now. Sign binding contracts with suppliers this week. Empty your piggybank.

In brief: If you have anything left of your 2002 budget, which for some reason you haven't used - Spend it. Now. Because in a few weeks, the treasury will be sending out a directive to immediately suspend all spending, clipped to a demand that every cost, down to paper clips, be re-examined.

Why? Because the state is out of money, and that's because of the steep, unforeseen drop in tax revenues. The finance minister and his chiefs are in Washington right now, but when they get back, they're about to learn once and for all that they don't have the resources for the government to meet its deficit target for 2002. Yes, that same target they swore just this week, hand on heart, before the rating agencies that they would meet come hell or high water.

Scaring investors

The deficit target stands at 3.9 percent of gross domestic product, or 4.4 percent if you do the math and deduct aid from the U.S. that arrived this year, which was actually for last year. Now, three months before the year ends, restraining government spending to meet that goal seems undoable.

The state's income from tax, mainly income and property tax, has been steadily dwindling for over a year. But the worst blow landed in August. When the data was collated (in September) it turned out that the state kitty was over a billion shekel short of expectations. The treasury's director-general, Ohad Marani, hastened to announce the shortfall. His "revenue warning" spooked investors badly and sparked the latest plunge in bond prices on the Tel Aviv Stock Exchange.

Marani's explanations for the hole were vague. He mentioned "problematic" figures and admitted that he didn't understand them. Nor could the "tax forum" the treasury launched under his stewardship do any better, for all that its members include accountant-general Nir Gilad, Income Tax Commissioner Tali Yaron-Eldar, Economics Department chief Michael Sarel and other dignitaries.

Now September has ended and the treasury chiefs must be biting their nails waiting for the data. Preliminary figures from the treasury indicate that collection picked up somewhat from its August slump, mainly thanks to the contribution of the Customs and VAT department.

But it won't be enough to change the big picture. Israel's tax revenues depend on economic activity, which has badly slowed.

No light at the end of the tunnel

Figures published by the Central Bureau of Statistics this week indicate that imports are plunging, which will cause a drop in customs income. Almost all businesses in Israel, from mom & pop retailers to the biggest industries, expect a drop in business "after the holidays". There is no obvious source of major profits or real estate deals, for instance, that could pick up the shortfall in revenues by year-end.

Nobody knows how short the government actually is, but it's probably in the range of NIS 1.5 billion to NIS 3 billion. If the government meant what it said about staying within its deficit framework, then it has no choice but to cut its budget again - this year's.

Sadly, that is not an option. Knesset is about to start tackling the 2003 budget. Politically, throwing the 2002 open for debate is just not on, especially as the year will be ending in less than 90 days.

To meet the promised deficit target, at least formally, the treasury will have to block expenses that have been budgeted for and approved. It can't stop paying salaries or subsidies for the poor, Marani explained, so it will freeze certain procurement and development budgets.

Since the treasury has to save a tremendous amount of money by year-end, it looks like it will have to block everything that is not absolutely essential. Paper, coffee, notebooks, classrooms, air conditioners, a new paint job - forget it. Buy it now or wave the request bye-bye.

Can the treasury do it? Well, if accountant-general Gilad simply refuses to sign the checks, it well might, for which it can thank the rating agencies. But the truth is, it's all a bluff. The spending will simply be deferred to next year. Next year's budget does not incorporate a clause for "deferred projects from 2002".

Thus, as spending spirals next year, the 2003 budget will have to be cut again - beyond the amendments already proposed, which have yet to even be approved by the Knesset.