Despite wartime deficit, Knesset approves allocation of ‘surplus’ coalition funds

Opposition rails at coalition for voting to transfer billions of funds to PM’s office and ministries that the Treasury advised shutting down to help cover cost of war effort

Sam Sokol is the Times of Israel's political correspondent. He was previously a reporter for the Jerusalem Post, Jewish Telegraphic Agency and Haaretz. He is the author of "Putin’s Hybrid War and the Jews"

United Torah Judaism MK Moshe Gafni chairs a meeting of the Knesset Finance Committee, July 2, 2024. (Noam Moskowitz, Office of the Knesset Spokesperson)
United Torah Judaism MK Moshe Gafni chairs a meeting of the Knesset Finance Committee, July 2, 2024. (Noam Moskowitz, Office of the Knesset Spokesperson)

The Knesset Finance Committee on Tuesday allocated hundreds of millions of shekels in “surplus” coalition funds to government ministries, despite the growing public deficit amid the war.

Following an hours-long debate, the committee in the end voted to transfer NIS 1.19 billion ($316,008,617) in surplus funds from the 2023 budget to the Prime Minister’s Office 2024 budget.

Surplus funds are money allocated but not spent as part of the previous year’s budget, while coalition funds are monies doled out to fulfill political promises made when wrangling to form a coalition government.

Despite strenuous objections by opposition lawmakers, the committee additionally approved the transfer of hundreds of millions in coalition funds to various ministries, including NIS 302 million ($80,197,144) to the Settlements and National Projects Ministry, NIS 94 million ($24,962,025) to the Social Equality Ministry and NIS 21 million ($5,576,622) to the Heritage Ministry.

“The only thing they can be trusted with is that they will transfer the coalition funds on time,” Opposition Leader Yair Lapid charged in the Knesset plenum following the committee vote.

“This they won’t forget. It’s the only thing they still know how to do.”

In December, the Finance Ministry reportedly recommended shutting down several of the ministries now getting surplus funds, such as the Settlements and National Projects Ministry, to free up money for the war effort.

Opposition Leader Yair Lapid argues against the 2024 amended budget during a debate in the Knesset, March 13, 2024. (Noam Moskowitz, Office of the Knesset Spokesperson)

In late October, following Hamas’s attack, the cabinet formally redirected all non-transferred coalition funds to be diverted toward the war effort.

But by early November, neither the Finance Ministry, which is led by far-right Minister Bezalel Smotrich, or the Knesset Finance Committee, had taken any steps to return billions in frozen funds back to the Treasury’s general reserve.

In response, Attorney General Gali Baharav-Miara decided to freeze all coalition funds, deeming them budgetary sources meant to fund war expenses.

Several days later, the Bank of Israel warned the government needed to slash additional non war-related spending, including discretionary coalition funds, to free up resources for the ongoing fighting with the Hamas terror group.

However, the cabinet subsequently unfroze billions in coalition funds, including hundreds of millions intended for ultra-Orthodox and pro-settlement parties.

Tuesday’s decision by the Finance Committee came only days after it voted to transfer NIS 559 million ($148,444,384) in surplus funds to the Agriculture Ministry, NIS 310 million ($82,321,572) to the Culture and Sports Ministry and NIS 5 million ($1,327,767) to the president’s office.

Finance Minister Bezalel Smotrich during a vote on the state budget at the assembly hall of the Knesset, in Jerusalem, March 13, 2024. (Yonatan Sindel/Flash90)

Last month, Treasury officials recommended to Finance Minister Bezalel Smotrich to impose cuts and taxes next year to raise an extra NIS 30-50 billion ($8-13.4 billion) to fund war costs.

According to Channel 12 news, during marathon discussions on the 2025 state budget, the officials told Smotrich that Israel needs to send a message to credit rating agencies that it is serious about proper financial oversight, and cannot continue increasing deficit spending, as the ongoing Israel-Hamas war incurs major costs on the country’s finances.

The fighting in Gaza is slated to incur NIS 253 billion ($67 billion) in defense outlays, expenditures for civilian needs, and lost tax income between 2023 and 2025, according to Bank of Israel estimates.

With the budget deficit in May already at 7.2% of GDP, over half a point above the 6.6% target set for 2024, and rating agencies downgrading Israel’s credit rating, the Bank of Israel and senior economists have urged “significant” fiscal adjustments on the spending side and tax increases on the revenue side to prevent the deficit from spiraling out of control.

United Torah Judaism MK Moshe Gafni chairs a meeting of the Knesset Finance Committee, July 2, 2024. (Noam Moskowitz, Office of the Knesset Spokesperson)

Calling for marathon budget talks in June, Smotrich emphasized the importance of fiscal responsibility and asserted a need for a swift procedure to draft the 2025 budget framework, which he said would create certainty and preserve investor confidence in the economy.

But Smotrich has been harshly criticized for failing to adjust fiscal priorities to address wartime needs and support the economy’s recovery. Despite making moderate spending cuts in the 2024 revised budget, Israel’s right-wing coalition has left in place billions of shekels in discretionary funds made available to political allies under deals reached in coalition talks ahead of the government’s formation in late 2022.

 Sharon Wrobel and Times of Israel staff contributed to this report.

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