New state budget will increase deficit, may aggravate inflation woes

Treasury charges on with plan to increase budget by billions in 2023; seemingly ignores own warnings on potential revenue shrinkage

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

Finance Minister Bezalel Smotrich presents economic and budget plans for 2023-2024, February 28, 2023. (Courtesy)
Finance Minister Bezalel Smotrich presents economic and budget plans for 2023-2024, February 28, 2023. (Courtesy)

The Finance Ministry provided the first glimpse of the state’s 2023-2024 budget on Thursday, presenting the nearly trillion shekel two-year proposal to the Knesset and meeting the first phase of its tight deadline to submit a fiscal plan.

Delayed by the November election, Prime Minister Benjamin Netanyahu’s government has until May 29 to successfully complete three budget votes on the Knesset floor or risk automatically triggering the government’s collapse.

Despite announcing topline budget figures and policy points last month, this is the first look the government has allowed into ministry-level allotments, as ministers failed to reach agreement in February.

Growing 7% from 2022 to 2023, the topline budget does not take into account inflation and recent warnings from senior finance officials that state revenues are likely to shrink due to expected economic harm connected to the coalition’s ongoing push to increase its own power at the expense of the judiciary.

Rather, Finance Minister Bezalel Smotrich submitted a growing budget based on outdated revenue figures. Smotrich explained last month that funding political promises, rising inflation, and new 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. Inflation, however, is a double-edged sword and increasing spending may also exacerbate the problem.

A Finance Ministry spokesperson released a statement accompanying the budget saying that among its chief objectives are reducing the cost of living, reducing market concentration and business sector bureaucratic barriers, developing infrastructure and housing stock, and combating undeclared money.

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

Yet critics maintain that the budget does not go far enough to reduce the soaring cost of living, a common political promise and the most top-of-mind issue for November’s general election voters.

The Ynet news site reported that most cost of living measures were removed, including policies that would fight market concentration by imposing restrictions on monopolies.

Additionally, working families will not have a temporary tax credit extended in 2023, and it will only return in 2024.

In recent days, several revenue-raising planned policies, including ending the VAT exemption for tourists and curbing tax benefits for retirees, were stripped from the proposal.

Additionally, the government’s sharply increased spending may be doubly problematic, contributing to rising inflation — currently standing at 5.2% — and increasing national debt.

Chief Finance Ministry economist Shira Greenberg recently reduced 2023 budget year revenue forecasts by NIS 10 billion to just NIS 437 billion, creating a nearly NIS 52 billion operating deficit in 2023.

In line with this, Greenberg earlier this week predicted up to a NIS 100 billion future annual contraction in state revenues, linked to potential damage to Israel’s democratic and governance rankings, credit rating downgrade, and investor skittishness if the judicial overhaul passes. Bank of Israel Governor Amir Yaron echoed these concerns to CNN, saying the “hasty” judicial shakeup was frightening investors, who are the lifeblood of Israel’s lucrative tech sector.

Shira Greenberg, chief economist of the Finance Ministry, attends a press conference at the ministry offices in Jerusalem, September 23, 2019 (Flash90)

The Finance Ministry’s proposed budget is expected to come to the Knesset for its first reading next week, days before the legislature enters a nearly month-long recess in April.

On Monday, Greenberg warned Smotrich that “damage to state revenues may begin to manifest itself closely following the reform’s implementation,” and given the government’s timeline, she recommended revising the revenue forecasts upon which the 2023-2034 budget was built.

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