Prime Minister Benjamin Netanyahu reportedly asked Finance Minister Yair Lapid to go back to the drawing board after being presented with a package of austerity measures aimed at shrinking the country’s NIS 39 billion deficit Thursday.
Lapid presented his outline for Israel’s 2014 budget to Netanyahu, kicking off negotiations over what measures Israel will take to shrink its shortfall.
In the meeting, Netanyahu opposed the sharp tax hikes, and requested that the Finance Ministry formulate alternative plans to the heavy budget cuts, Forbes magazine reported. Netanyahu specifically asked that Lapid pull back from sharp cuts in earmarks for road and rail development and the Defense Ministry, but expressed support for other austerity measures.
“We managed to pass through the global crisis in peace,” Netanyahu reportedly told Lapid. “Growth in Israel is higher than in the US, the European countries and most of the developed countries and the unemployment rate in Israel is lower than most developed countries in the West. We must meet the fiscal targets set.”
“Serious budget cuts will make it harder for the public, but will prevent the collapse of the economy as in Greece and Spain,” the prime minister acknowledged.
An additional meeting between Lapid and Netanyahu is set to take place Sunday.
The budget outline, according to a Finance Ministry spokesperson, reflects Lapid’s vision for the Israeli market and places the working man in its center.
Among the planned measures appearing in the outline are cuts to allowances for children and a tax increase for consumers and top earners. Also included in the outline’s specified measures is a 1 percent hike in the VAT sales tax, which will bring it up to 18 percent.
The budget outline further suggests that Israel will gradually cancel the VAT exemption on fruits and vegetables and will impose the sales tax in the southern resort city of Eilat, which is currently a duty-free zone. The proposal also 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 rest of the ministries.
Lapid’s spokesperson added that the outline contains an imposition of taxes on luxury cars, luxury apartments and other luxury goods.
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.
Finance Ministry officials stressed Wednesday that the presentation was not a final draft, but a suggestion of steps that should be taken to shrink the deficit, Israel Radio reported.
Lapid had warned upon taking office that he would have to make severe cuts, calling the deficit “monstrous,” and saying the country’s financial situation was worse than he thought.
Israel’s budget deficit in 2012 reached NIS 39 billion, or 4.2% of its gross domestic product, more than double the state’s originally projection for the shortfall. Officials have said new taxes and severe cuts in public expenditures would have to be put into place in the 2013 budget in order to bring the deficit under control.
The cabinet will have until June 9 to pass the budget, at which time the Knesset will have a day to vote to move it to the Knesset Finance Committee. The final budget will go up for final passage by the end of July.
On Wednesday, ministers fearful of possible cuts said they would fight any shrinking of their coffers.
At a press conference on Wednesday, Transportation Minister Yisrael Katz said that a reduction in his ministry’s budget “will cost the treasury billions. It will involve broken promises and a loss of trust by those residents who live in the periphery.
“After four years, there’s an attempt to exploit the budget crisis to set upon the billions designated for infrastructure works,” he added.
Minister of Public Security Yitzhak Aharonovitch also vowed to oppose any cuts to his ministry’s budget.
At a ceremony on Wednesday, Aharonovitch said he intended to do whatever it takes to prevent cutbacks, calling it a matter of “national interest.”