Treasury blames coalition agreements for budget blowout

Moshe Kahlon (Photo: Ouria Tadmor)
Moshe Kahlon (Photo: Ouria Tadmor)

The Histadrut agrees to defer a public sector pay rise, but the price is high.

The coalition agreements signed when the government was formed are weighing on the two-year budget that will be presented for the government's approval at the end of this week.

The Ministry of Finance presented a series of cuts and adjustments today that it says stem from a NIS 18 billion hole in the 2017 budget that has largely been caused by the need to finance expenditure promised to political parties when the government was formed.

To close the gap, the Ministry of Finance has had to raise the target for the deficit to GDP ratio from 2.5% to 2.9% in 2017 and from 2.25% to 2.9% in 2018. The Ministry of Finance admits that this will lead to a slight rise in Israel's debt to GDP ratio, for the first time since 2002. The ministry says that the ratio will resume its decline in 2019, for which the deficit target is 2.5%. In addition, in the forthcoming budget the Ministry of Finance has had to exceed considerably the spending ceiling that limits the annual rise in government spending to 2.7%. The ministry's plans involve spending growth of no less than 5.1% in 2017 and 3.1% in 2018.

These figures come against the background of the publication of a position paper by the Bank of Israel calling for the spending limit rule to be replaced by some other measure because it has become a "dead letter", particularly at a time of procyclical fiscal policy.

In order to bridge the fiscal gap, the Ministry of Finance has decided on another across-the-board cut in the operational and purchasing budgets of government ministries, meant to save NIS 2 billion. The ministry also reached agreement yesterday with the Histadrut on postponement of the pay rise promised to public sector workers. Under the pay agreement, the salaries of public sector employees were to have risen in three stages in 2017: by 1.5% in January; 1.75% in June; and 1.5% in December. Under yesterday's agreement, the first two stages will each be deferred for six months, while the third stage is deferred to March 2017 and will rise to 1.75%. The total pay rise in the public sector will thus grow from 7.5% to 7.75%. The Ministry of Finance says that the agreement with the Histadrut will make it possible to reduce budget spending in 2017 by NIS 2 billion.

The deferment of the public sector pay rise is in effect a loan that the Histadrut is granting to the Ministry of Finance for which it is charging 0.25% interest. A simple calculation by one economist today shows that 0.25% on a pay rise of 1.5% is actually an annual rate of interest of 12.5%, a rate more suited to the grey market. Apart from the image problem, the agreement with the Histadrut gives rise to a complicated legal problem. The Ministry of Finance is already exceeding the spending limit by NIS 8 billion for 2019. The maximum excess that the law allows is NIS 2 billion. In response to an inquiry by "Globes", the Ministry of Finance said today that it had no intention of changing the law, and that there was no deviation from the legal spending framework.

In addition to deferring spending and cutting ministerial budgets, the Ministry of Finance has been forced to demonstrate creativity in expanding sources of revenue in the forthcoming budget. The main sources of extra revenue are the cash accumulated by the Israel Airports Authority (NIS 2 billion) and the Jewish National Fund (NIS 1.4 billion). Other sources are the new tax to be imposed on people owning three or more homes (NIS 800 million), and the equalization of tax paid by kibbutz members to that imposed on regular taxpayers (NIS 500 million).

Published by Globes [online], Israel business news - www.globes-online.com - on August 8, 2016

© Copyright of Globes Publisher Itonut (1983) Ltd. 2016

Moshe Kahlon (Photo: Ouria Tadmor)
Moshe Kahlon (Photo: Ouria Tadmor)
Twitter Facebook Linkedin RSS Newsletters גלובס Israel Business Conference 2018