Flug, Kahlon seek higher social spending in 2019

Moshe Kahlon, Karnit Flug  photo: Uriah Tadmor

Governor of the Bank of Israel Karnit Flug has questioned the relevance of the rule restricting the annual rise in government spending. 

Governor of the Bank of Israel Karnit Flug believes the time has come to consider abolishing the spending rule, the pillar of every Israeli government's belt tightening policy since 2004. Flug talked to Prime Minister Benjamin Netanyahu and Minister of Finance Moshe Kahlon about the matter at a closed meeting held a few days ago at which the state budget framework for 2019 was presented. Sources inform "Globes" that it emerged at the meeting that government expenditure is likely to grow by no less than NIS 30 billion in 2019 in comparison with 2018. The minister of finance presented a program of spending cuts (adjustments) amounting to NIS 10 billion out of this sum, but he is recommending to the government that it should raise budget spending in 2019 by 5% or more, that is, about NIS 20 billion.

The maximum rise in government expenditure permitted under the fiscal law known as "the spending rule" is set at 2.6%, which amounts to just NIS 9 billion. If the government approves the dramatic rise in spending that Kahlon is proposing, this will require legislation. This would not be the first time the government has changed the spending rule in the course of approving the budget. In fact, this has happened more and more frequently in recent years. According to sources at the meeting, Flug said that the very existence of the spending rule should be reviewed, and that if it was decided to retain it all the same, then consideration should be given to what it should look like. Flug explained that there was no point in continuing to abide by a rule designed to curb civilian spending when the government sought to promote an opposite policy of expanding civilian spending. Nevertheless, she called for strict adherence to the fiscal deficit target and to the falling deficit curve, against the background of the intention to raise the deficit in 2019 from 2.5% of GDP to 2.9%.

For its part, the Ministry of Finance did not support Flug's stance, and merely sought a one-time rise in the spending rule limit, without foregoing the rule itself. The ministry generally uses the spending rule as a bargaining card in its efforts to rein in politicians' spending demands.

The Ministry of Finance stated: "The Bank of Israel argues that a tax hike is needed in order to expand budget spending. The government's position is that taxes should not be raised at this time."

Israelis paying a high price

Although the spending rule has been changed many times, it has made an important contribution to Israel's achievement in reducing government debt as a proportion of GDP to under 60%. This achievement, however, while it is much admired by the credit rating agencies, has exacted a high price of Israel's citizens in the form of ever shrinking rates of spending on public services such as education, health, welfare and so on. The consequence is that Israelis have not felt the economy's growth in the past few years in the standard of the services they receive from the government.

The Bank of Israel commented on this in its 2015 report, writing: "The growth in GDP raises people's income, and they seek to consume government services of a higher standard, and expect a social safety net in accordance with their incomes." In practice, however, civilian spending has lagged a long way behind GDP growth. An international comparison shows how far the belt-tightening policy has succeeded. If in 2007 the rate of public spending as a proportion of GDP was close to the OECD average, by 2015 it was six percentage points below the OECD average, and Israel was second last in the ranking, before the US. To this statistic must be added the fact that a relatively large proportion of public spending in Israel goes to defense and debt servicing, so that the portion devoted to civilian services is even smaller.

Published by Globes [online], Israel business news - www.globes-online.com - on January 4, 2018

© Copyright of Globes Publisher Itonut (1983) Ltd. 2018

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Moshe Kahlon, Karnit Flug  photo: Uriah Tadmor
Moshe Kahlon, Karnit Flug photo: Uriah Tadmor
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