Finance Minister Yair Lapid’s proposal to raise the budget deficit target has met with stiff opposition, most recently from outgoing Bank of Israel Governor Stanley Fischer.
Fischer, who will step down as head of the Bank of Israel in June, warned last week against raising the target, calling it an economically unsound move that would damage Israel’s economic standing worldwide as well as its credit rating, according to a Sunday report in the Haaretz daily.
The budget deficit target is set annually by the government as the acceptable limit of national debt, which in turn influences the proposed budget for that year. If the national deficit grows to be greater than the deficit target, the government may resort to austerity measures — budget cuts and increased taxes.
The new finance minister faces the daunting task of lowering a budget deficit of NIS 39 billion. Lapid has proposed raising this year’s target to 4.2 percent of the gross domestic product (GDP). In 2012 the deficit target was 2%, but the final budget deficit last year was 4.2% of Israel’s GDP.
In June 2012, the Cabinet approved raising the 2013 target from 1.5% to 3%. Lapid’s proposal to further raise the target is meant to minimize the sweeping budget cuts that the government would be forced to undertake if this target is not met.
He has already faced staunch opposition over his proposed austerity measures, including on Sunday from Deputy Defense Minister Danny Danon, who said Lapid’s suggested defense spending cuts would damage national security.
Speaking to Israel Radio, Danon added that proposed reductions will also affect the general population in the form of thousands of employees losing their jobs as civilians employed by the defense industry.
Lapid took to Facebook on Saturday evening to defend the possible austerity measures.
“I know it isn’t easy and I know the austerity measures are scary… the steps we are taking now are painful, but necessary, fixes that will not last too long,” Lapid assured his 190,000 Facebook friends. “Everything we are doing is part of a long-term plan that will produce a fundamental change in education, housing, lowering the cost of living and equality of the burden — everything that is important to the working Israeli.”
Lapid warned that “we can’t change the economy in one day, or in three weeks. First of all, we have to go back to acting responsibly so that we do not become like Greece or Spain.”
Environmental Protection Minister Amir Peretz (Hatnua) came out in support of raising the budget deficit target on Sunday. “Raising the deficit target by 1% is not a dramatic move that is liable to shake up our relationship with the world economy,” Peretz told Army Radio.
Nevertheless, Peretz warned, “any cut that is too deep a cut and harms the public will be very difficult to fix afterwards.”
Lapid has proposed, as well, to gradually cancel the VAT (sales tax) exemption on fruits and vegetables. Eitan Broshi, the head of the United Kibbutz Movement, blasted the proposal on Sunday, calling it a “devastating blow to agriculture.” Broshi told Israel Radio that the budget deficit was not caused by the agricultural industry and that the solution should not be one that hurts farmers.
On Thursday, Lapid presented his outline for Israel’s 2014 budget to Prime Minister Benjamin Netanyahu, kicking off negotiations over what measures Israel will take to shrink its shortfall. Netanyahu was said to be opposed to proposed tax hikes, and requested that the Finance Ministry formulate alternatives to the heavy budget cuts for road and rail development and the Defense Ministry, while expressing support for other measures.
An additional meeting between Lapid and Netanyahu was set to take place Sunday, but will now only happen after Lapid and Fischer have met to further discuss the budget deficit proposal.
Among the planned measures are cuts to child allowances and a tax increase for consumers and top earners. Also included in the plan’s specified measures is a 1%hike in the VAT sales tax, which will bring it up to 18%.
The budget outline further suggests that Israel will impose VAT in the southern resort city of Eilat, which is currently a duty-free zone. The proposal includes a 1% rise in income taxes for those making over NIS 20,000, a similar hike in corporate taxes, a NIS 3-4 billion cut to the Defense Ministry budget, and a NIS 6 billion cut to the other government ministries.
Lapid’s spokesperson added that the outline contains additional taxes on luxury cars, luxury apartments, and other luxury goods like yachts and large television screens.
The budget outline, which also includes a freeze in raises for government workers and new infrastructure development, will likely face an uphill battle before it goes to a vote this summer. On Wednesday, ministers preemptively denounced the prospect of cuts and vowed to protect their budgets.
According to an estimation in the Hebrew daily Maariv, the budget plan will put an extra NIS 26.9 billion in the state’s treasury.
Ron Friedman contributed to this report.