The Bottom Line / The Sting

Budget 1. The year 2005 ended with excellent figures, both on the macro level and in terms of the budget.

Finance Minister Ehud Olmert forgot to mention that these achievements were the results of the policy of his predecessor, Benjamin Netanyahu, the same policy that Olmert opposed for the past three years. But Olmert also did not mention that the achievements were the result of the disengagement from Gaza, the reduction in terror and the diplomatic horizon opened up by Prime Minister Ariel Sharon - all of which Olmert supported from the beginning.

Budget outlays were 3 percent higher nominally than in 2004. By law, real spending can be increased by 1 percent. Why the increase? Once again, the security budget, which despite the interminable talk about the need for it to be cut, grew by NIS 1.2 billion in the course of the year in addition to the giant overrun in the disengagement budget.

On the income side of the ledger, tax revenues were up by 8 percent over 2004 (more or less in line with forecasts). That was the result of the very high growth rate of 5.2 percent, tempered by reductions in rates of income tax, VAT and other indirect taxes. It turns out that the Laffer Curve actually works: The more you lower taxes, the more growth and business activity rise, which in turn increase tax revenues. That's why it is smart to keep reducing taxes.

Budget 2. The 2006 budget has not been approved, and the government is working according to a limitation stipulating monthly budgets of one-twelfth of spending for 2005. On the face of it, this puts sharp restrictions on spending, but in practice the limitation is nonexistent.

After all, this is an election year, and Olmert has already told treasury officials "to act with flexibility so that all services that the government is obligated to provide to citizens are not damaged." He even established three budget exception committees, the first of which will be headed by the deputy general accountants.

It is reasonable to assume that senior treasury officials have already taken to heart the "esprit du commandant" and will behave "flexibly" to approve all sorts of requests and exceptions that cross their desks - including ones from the finance minister himself or his "immediate circle."

That is why the budget limitation is ineffective. The concept is bankrupt, and the law should be changed so that if there's still no budget by the time December 31 rolls around, the government has no superfluous and pricey three-month grace period.

Budget 3. While the good news of the 2005 budget was being publicized, Netanyahu announced his intention of preventing the state from being left without a budget for months on end. He called on all the parties to unite in approving the 2006 budget immediately. Is this a rare gesture of national unity? Not exactly.

Everyone knows that the 2006 budget was prepared by Netanyahu, which means that its passage by the Knesset would mean that his plans would be carried out by his rival. In addition, Netanyahu knows that passing the budget now is Mission Impossible.

Most of the Knesset factions will vote against it. Shas will vote for increasing child, old-age and welfare allowances. Labor Party Chairman Amir Peretz will vote for a big package of social-welfare changes. The National Religious Party and the rightist parties will want more money for the settlements. That is why the support of Kadima, Likud and Shinui are not sufficient for approving the budget.

The conclusion is that Netanyahu is setting a honey trap for Olmert. If Olmert were to begin to negotiate with the parties, he would be forced to buy their support with billions of shekels, subjecting him to criticism for being a spendthrift on the one side and the devil incarnate for not wanting to help the poor on the other. The parties would pluck him clean, and in the end he still would not be able to pass the budget. His status would only be hurt by it all.

But since even Olmert was not born yesterday, he will be very polite toward Netanyahu and his offer and he will make some declarations, but he will not do a thing.