ISRAEL AT WAR - DAY 146

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Analysis

Revised 2024 budget passes 1st hurdle, but critics say it is harmful

The budget needed amending to finance the war effort, but it comes at the price of higher taxes and spending cuts that will harm the weak; will legislators force a rethink?

Sharon Wrobel

Sharon Wrobel is a tech reporter for The Times of Israel.

Members of Prime Minister Benjamin Netanyahu's cabinet during a meeting to approve the amended 2024 budget, January 15, 2024. (Haim Zach, GPO)
Members of Prime Minister Benjamin Netanyahu's cabinet during a meeting to approve the amended 2024 budget, January 15, 2024. (Haim Zach, GPO)

At the end of last week, cabinet approval for the revised 2024 state budget was still bogged down in political rifts, with several ministers fuming over its provisions for cuts to all ministries, among other concerns.

But after a delay, on Monday Prime Minister Benjamin Netanyahu and Finance Minister Bezalel Smotrich managed to win ministers’ approval for the spending changes, citing the urgency stemming from the ongoing war against the Hamas terror group.

However, the amendments still need to be approved by the Knesset Finance Committee, where changes could be in the offing, and then by the full Knesset. (The Knesset passed the original 2024 budget last May.)

For now, Netanyahu and Smotrich set a deficit target of 6.6% of national output for 2024, while finding budgetary sources to finance the ballooning increase in expenditure of about NIS 70 billion ($19 billion) amid expectations of a shortfall of NIS 36 billion in state revenues. According to the Bank of Israel, the war’s expenses from 2023 through 2025 are expected to amount to NIS 220 billion. The estimate does not include the loss of revenue due to the war’s effects.

The result is that Israel will have the second largest deficit in the Western world after the US, and five times the average in OECD countries, according to a presentation prepared for the cabinet by the Finance Ministry’s chief economist Shmuel Abramzon.

While the extra NIS 55 billion for defense, alongside compensation for those impacted by the fighting, are hardly disputed, critics are frustrated by what they see as the right-wing coalition’s refusal to substantially change national priorities to free up funds and offset higher spending. Rather than dismantling unnecessary ministries to help lower spending, for instance, the government opted for across-the-board cuts.

With ministerial approval secured for the revised 2024 budget, Smotrich was quick to pronounce that the government was “changing the order of priorities.” But despite the attempt to claim that a responsible and prudent fiscal program has been adopted during wartime, examination of the measures indicates that they will mainly harm the working middle class and the disadvantaged.

The fiscal measures approved by the cabinet essentially mean that households will have less disposable income, while social and civil services are likely to be affected, which in turn will have a further harmful impact on low-income earners and the working middle class.

Prime Minister Benjamin Netanyahu and Finance Minister Bezalel Smotrich during a cabinet meeting convened to approve the 2024 amended state budget, January 15, 2024. (Haim Zach, GPO)

The measures to offset wartime spending include a 0.15% health tax increase, a rise in national insurance premiums, and a possible hike of 1% in value-added tax (VAT), to 18%.

VAT levied on goods and services is a regressive tax, meaning that a higher rate harms the lower-income population more than higher earners, and contributes to increasing the already high cost of living.

Meanwhile, the Bank of Israel noted that other new measures, such as the imposition of a carbon tax, would have been necessary even without the war in order to advance environmental targets, and reduce congestion and environmental damage.

Cuts that should happen, and some that shouldn’t

On the spending front, reductions include a 5% across-the-board cut to ministry budgets. However, Netanyahu and Smotrich failed to agree on reducing the number of government ministries despite the Finance Ministry’s recommendation that 10 superfluous ministries — including the Settlements and National Missions Ministry, the Jerusalem and Jewish Tradition Ministry and the Intelligence Ministry — should be closed to help cover the wartime shortfall.

Thus, hundreds of millions of shekels will continue to flow to the contested Settlements Ministry, headed by far-right minister Orit Strock. This has been lambasted by opposition lawmakers as an “invented” and “political” ministry, established to channel money to the electorate of Smotrich and Strock’s Religious Zionism party.

It was also agreed that only NIS 2.5 billion would be cut from NIS 8 billion in coalition funds — discretionary spending earmarked for pet projects of MKs and ministers. Part of the money is intended for funding private ultra-Orthodox education, which is seen as a way to keep Haredim from integrating into mainstream Israeli society, obtaining an education, and entering the workforce.

Israeli security and rescue forces at the scene where a rocket fired from the Gaza Strip by Palestinian terrorists hit and caused damage in Holon, December 11, 2023. (Avshalom Sassoni/Flash90)

Strengthening ultra-Orthodox education that does not teach the core subjects will further undermine the economy as it struggles to recover from the impact of the war.

Meanwhile, Bank of Israel governor Amir Yaron criticized as counterproductive a move to cut about 15% of funding for a five-year plan intended to advance the social and economic integration of Arab Israelis.

Yaron further warned this week that “persistent and significant increase in the defense budget from now onward, without making necessary budget adjustments against that increase, may impair economic growth and affect how the strength of the Israeli economy is perceived.”

Finance Ministry chief economist Abramzon now expects Israel’s economy to grow at a rate of 1.6% in 2024, on the assumption that the war in Gaza will last five months and limited hostilities in the north will end by February 2024. In a more pessimistic scenario, should the war continue until the end of 2024, the estimate is for the economy to contract by 1.5%.

Netanyahu and Smotrich seemed unworried even as the Bank of Israel, leading business leaders, and economists voice concerns that the government was not showing enough willingness to cut nonessential spending that does not promote economic growth.

The concern among economists is that the fiscal plan is shortsighted and could also negatively impact future decisions by credit rating agencies, which in turn could lead to higher costs for raising debt by the State of Israel. Israel’s risk premium – the higher rates of interest investors will demand in exchange for heightened risk – has already increased as the war began and is likely to stay high for the time being.

With the war raging on and Israel facing a large deficit in 2024, the question now is whether legislators in the Knesset Finance Committee will force a rethink.

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