Lapid plans to halve proposed budget cuts, raise deficit

Responding to pressure over planned austerity measures, Finance Minister Yair Lapid reportedly backed off half his proposed budget cuts Wednesday, agreeing to put NIS 6.5 billion back into the budget.

However, the move will give Israel its largest deficit ever, and could face opposition from Bank of Israel economists.

Lapid had previously proposed a plan to reduce the country’s NIS 39 billion deficit by NIS 13 billion through a program of raised taxes and cuts to ministry budgets and public entitlements.

Putting NIS 6.5 billion back into the budget would mean raising the deficit ceiling to 4.9 percent of GDP for 2013, well above the current 3% and more than double the target of 2% originally set for 2012.

The move, which has the backing of Prime Minister Benjamin Netanyahu, is expected to be presented to the Cabinet on Sunday.

However, the Bank of Israel, which has opposed raising the deficit above 3% of GDP, is likely to be unhappy with the plan. Previous attempts by Lapid to raise the ceiling have been rejected by the central bank.

The Finance Ministry proposal cites budget overruns in 2012 and the delay in getting a 2013 budget passed as reasons for allowing the high deficit ceiling. It notes that the deficit would return to 3% in 2014.

Lapid’s original budget plan ran up against heavy opposition from fellow politicians and union representatives, who opposed cuts to ministry budgets and state worker salaries. The mayor of Eilat, which would have lost its duty-free status, threatened to close off the city if the budget went through.

Lapid has defended the austerity plan as a painful but necessary measure to rein in the deficit and prevent further financial issues down the road.