A budget... at last

It's not all over yet, but at last – and at least – the government has approved (on 13 May) the new-fangled 2-year State Budget for 2009-2010. It's not over because the budget still has to past muster with the Knesset Finance Committee – always a difficult hurdle – and has to be approved into law by a plenary session of the Knesset, another not simple task. But the first step in the process has been taken and this is good news. Or is it?

The government approval of the budget was preceded by an incredible amount of political wrangling, with threats to bring the government down issued pretty much on a daily basis, "if this or that is not included in or excluded from the budget".

There were also major problems with the management of this initial stage of the budget approval process. A week before government approval, the Ministry of Finance published a list of draconic measures to be included in the budget, which immediately raised storms of indignation, both in the general public and among politicians from all parties, not only from the opposition. The main claim was that the measures would mostly adversely affect the lower-income population.

It is extremely unlikely that Prime Minister (PM) Binyamin Netanyahu was unaware of these proposed measures before their publication by the Finance Ministry, and yet immediately after they were announced and in reaction to the public and political criticism, the PM scolded the Ministry, demanding that it take another look at the measures and scrub most of them.

Another problem is with the question of who is responsible for the approved budget proposal. The Minister of Finance, Yuval Steinitz, has little experience with economic matters and from the outset of this new government, the PM stated that in addition to his being PM, he would also act as a kind of Super-Minister for Long-term Economic Strategy (he was the Finance Minister in 2003-2005 – with not inconsiderable success at the job, so at least he has experience with economic affairs). There are accusations that the recently approved budget is mostly not the work of the Finance Minister and his staff (as it would normally be) but rather the work of the PM and his chief economic adviser, who were accused of bypassing the Finance Ministry.

One potentially serious outcome of this internal struggle was the resignation of the head of the Finance Ministry's Budget Department, immediately after the budget was approved by the government: he stated that he could not take any responsibility for the approved budget (or was not given responsibility for it) and therefore felt that he had no choice but to resign.

And then there is the question of who won the political battle over the budget. The main argument was over the expenditure increase. The PM and his Likud party wanted the increase to be limited to 1.7% - the Labor Party, a coalition partner, argued for a much larger increase, in line with other governments around the world who have adopted large government expenditure increases to help their economies emerge from the recession. The compromise in the approved budget was a 3% expenditure increase both in 2009 and in 2010. As usually happens in Israel, after the compromise was reached, all sides claimed victory.
Does the government-approved budget match the campaign promises of the PM? The answer is no: among other things, the PM promised tax cuts as a way of reviving the economy, but in fact the budget calls for tax increases (VAT is to increase from 15.5% to 16.5% and VAT is to be levied on fruits and vegetables for the first time in Israel's history).

The government obviously felt it had no choice here: the recession has brought about a drastic decline in tax revenues, while the plans of the Finance Ministry to lower government expenditure in 2009 and 2010 will only partially materialize: this is particularly true of the defense budget, by far Israel's largest budget at the ministry level, where the compromise in the approved budget was to lower expenditure by just 25% of the expenditure cut that the Finance Ministry proposed (it turns out that the Minister of Defense is the leader of the Labor Party, which pushed for the far larger increase in overall government expenditure).

The outcome of all this is that the expected budget deficit is 6% of GDP in 2009 and 5.5% in 2010, a recession-level deficit, whose financing will call for a dramatic increase of government debt, both domestic and foreign.

So is the government approval of the budget good news? Only time will tell if the new budget contributes to reviving the economy. Certainly the lower income groups can be satisfied – almost all of the draconic measures initially proposed by the Ministry of Finance have been abandoned.