New budget heads to Knesset with massive NIS 32b increase, despite inflation fears

Finance Minister Smotrich blames swell on coalition deals, inflation and public salary increases; as for economic risks of judicial overhaul, he says: ‘I don’t see a catastrophe’

Carrie Keller-Lynn is a former political and legal correspondent for The Times of Israel

Finance Minister Bezalel Smotrich presents the state budget at his Jerusalem ministry, February 28, 2023. (Yonatan Sindel/Flash90)
Finance Minister Bezalel Smotrich presents the state budget at his Jerusalem ministry, February 28, 2023. (Yonatan Sindel/Flash90)

Finance Minister Bezalel Smotrich on Tuesday presented considerations behind the 2023-2024 state budget, which he said was set to provide “ten of billions” of shekels to fulfill coalition agreements, among other state priorities.

The minister said the need to fund political promises, rising inflation and debates over public worker salary agreements complicated the budget process and ballooned the proposal to NIS 484.8 billion ($133 billion) in 2023 and NIS 513.7 billion in 2024 ($141 billion), up from NIS 452.5 billion ($124 billion) in 2022.

On Friday the government passed a simplified, water-down version of the budget, versus a full, negotiated document, passing the heavy lift to the Knesset.

Despite branding the press conference as a “budget presentation,” the full slate of the budget’s proposals and the latest budget document were not disclosed. Rather, Smotrich and his ministry’s budget director shared considerations in shaping the document, a few policy proposals, and partial financial figures.

Smotrich also did not dig deep into his plan to fight market concentration, despite being blasted in Hebrew media on Friday for failing to address one of the key drivers of Israel’s rising cost of living.

The finance minister also dismissed claims that the government’s plan to overhaul the judiciary is hurting the economy, despite the shekel slipping precipitously against the dollar.

“I’m not saying nothing is happening,” Smotrich said of the economic downturn. “But it’s not because of the reform, but because of how things are being portrayed. I believe that the rating agencies understand that there is a political interest here,” he said.

Agencies are looking at the planned overhaul, with economists warning they could potentially lower Israel’s credit rating.

Smotrich said the government was “prepared to accept tremors in the economy. I don’t see a catastrophe.”

The finance minister’s main fight over the budget might come in the Knesset, which needs to approve the plan by May 28. Only two months into Prime Minister Benjamin Netanyahu’s right-wing, far-right, and religious government, tensions have already started to boil over into political and policy showdowns that could translate into MKs withholding critical votes on the Knesset floor.

Finance Minister Bezalel Smotrich (left) presents the state budget at his Jerusalem ministry, February 28, 2023. (Yonatan Sindel/Flash90

Smotrich said he plans to bring the two-year budget for its first reading on March 27 and complete its required second and third readings the following week. He urged the rest of the coalition to rally behind the budget, setting aside brewing tensions, some tied to coalition promises and some to policy in the West Bank.

Among possible roadblocks, ultra-Orthodox United Torah Judaism is frustrated about not receiving the full slate of budget boosts promised to them in their coalition agreement with Netanyahu’s Likud. In particular, UTJ is reportedly fuming about the budget not sufficiently raising funding to the Haredi community’s separate educational systems, despite a 40% bump of NIS 2.5 billion ($684 million) in the budget.

Veteran UTJ lawmaker Moshe Gafni runs the Knesset’s powerful Finance Committee, where he has the power to stonewall budget discussions until agreements are reached.

On Monday, UTJ boycotted a Knesset debate in which the opposition attacked the government’s judicial reform plan, over budget squabbles.

Last fall, Netanyahu committed to increasing funding for ultra-Orthodox school systems, which had been starved for years as a result of not implementing a core curriculum. Netanyahu’s deal allows the school networks to get boosted funds without introducing the subjects seen as critical to workforce integration, including math, science, and English.

Illustrative: Haredi children from the Bnei Moshe Kretchnif ultra-Orthodox school in the city of Rehovot, May 24, 2020. (Yossi Zeliger/Flash90)

In addition, the two ultra-Orthodox parties secured coalition promises to pass legislation enshrining military exemptions for Torah study before the budget passes.

“I hope the ministers and lawmakers will be responsible” and pass the budget bill, the finance minister said, adding later that voting against the budget would be tantamount to “preventing us from lowering the cost of living.”

Cost of living is seen as the issue at the top of voters’ minds, both before the November contest that brought Netanyahu’s bloc to power as well as now, and is particularly sensitive to the ultra-Orthodox parties and the communities they represent.

Smotrich reaffirmed promises to tackle the cost of living, and in particular, market concentration, but did not present a comprehensive proposal. Among piecemeal initiatives, Yogev Gradus, the Finance Ministry’s budget director, said that the government would reinstate tax credits for working families in 2024, but applying the proposal to 2023 was still an open question.

Gradus also said that there was a “moderation” in state income, tied in part to the macroeconomic conditions. Income is only expected to grow from NIS 468.4 billion ($128 billion) in both 2022 and 2023 to NIS 497.6 billion ($136 billion) in 2024, leaving a NIS 32.5 billion ($9 billion) addition to the deficit in the new two-year budget.

In this handout photo, Prime Minister Benjamin Netanyahu (left) and Finance Minister Bezalel Smotrich arrive for a meeting at the Prime Minister’s Office in Jerusalem on February 23, 2023. (Kobi Gideon/GPO)

While stressing that the costs of state-subsidized childcare would not increase, Smotrich also demurred on sharing specific details for early childhood daycare or education, a Likud election promise. Netanyahu committed during the campaign to support a solution for free education for ages 0 to 3, but the government appears to only be planning to subsidize ages 2-3 in the budget. This plan too remains vague.

Regarding housing, Smotrich and Gradus said that construction around the country is currently on a positive trend, and the challenge will be to continue the current trajectory, requiring 50,000-60,000 new housing units next year to keep apace.

Smotrich also highlighted how politics crept into the budget-making process, something that Gradus stressed was common to past coalitions.

“I faced a tension all the time between the desire to go with my economic truth and the need… to enable ministers to implement their policies,” the finance minister said.

The finance minister also criticized a “complicated” and hard-fought salary agreement the last government signed with teachers’ unions, which added a NIS 4.5 billion ($1.2 billion) commitment to 2023.

“We received this inheritance and we will deal with it,” he said.

Nevertheless, he implied that the NIS 9 billion ($2.5 billion) that he confirmed will go to Itamar Ben Gvir’s National Security Ministry was not political, saying that, “the agreement is very complex and we don’t look at it that way.” Ben Gvir has said the additional funds would be used to establish a national guard and recruit thousands of police officers, prison guards and firefighters, among other priorities.

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