Jerusalem, 30 July 1995

1996 BUDGET PROCESS BEGINS

(COMMUNICATED BY GPO ECONOMICS DESK)

On 30.7.95, by a vote of 14-6, the Cabinet approved the budget submitted to it by the Finance Ministry. The vote followed a series of meetings that began on 9.7.95, when the Government officially began discussions leading up to the presentation of its 1996 budget to the Knesset. The major issues which faced the Government in drawing up the budget include both a growing balance of payments problem and a growing balance of trade problem, together with the costs of peace, according to the Finance Ministry. During further discussions, which are scheduled to take place at cabinet meetings during August, the Treasury will ask the Government to set national priorities and work with each ministry to cut costs, in order to be able to balance budget needs with available financing. The Treasury requested, and received approval from the Government for removing between NIS 2.15 billion of its planned 1996 expenditures in order to decrease the deficit as a percentage of GDP.

Finance Minister Avraham Shohat asked the Government to approve a 1996 budget of NIS 133 billion before debt repayment set-off by Government revenues of NIS 123.2 billion. Without reductions in Government spending, the budget deficit is expected to reach NIS 8.95 billion, or 3.3% of the country’s GDP. The Treasury’s aim is to bring the deficit closer to NIS 6.8 billion, or 2.5% of the GDP, down from 1995’s expected 2.75% of GDP. A number of ministers expressed their opposition to the idea of budget austerity including those with social portfolios like Health, Religion, Labor, and those with investment encouragement programs like Industry and Trade, and Agriculture. On the other hand, Finance Minister Shohat raised the possibility of increasing taxes to bridge the gap, despite potential problems in an election year. In the end, however, due to the Government’s agreement to cut the budget, no new taxes were required. In fact, Finance Minister Shohat said that taxes in 1996 will be reduced in accordance with the Ministry’s long term plans.

In the 1996 budget, the Treasury will attempt to address the Government’s balance of payments problem which has risen not only as a result of a decrease in national savings, but also due to greater public spending, and a growing trade deficit. The Treasury estimates that the balance of payments deficit will reach approximately $4 billion by the end of the year; it was $2.8 billion in 1994, and $1.4 billion in 1993. According to the Ministry, a cut in spending including restraining public sector wage agreements will increase national savings by spurring public savings, thereby decreasing the Government’s need to seek financing abroad to cover the deficit. This is especially important this year, Treasury officials said, in order not to harm the chances of continued economic growth next year, and not to endanger the economic reforms which have caused economic growth to continue at a rate of more than 5% during the past five years. These sources commented that the effort to control inflation and reduce unemployment, and encouragement of private savings, which has fallen in the past few years, as well as the increased competitiveness of the economy, are all areas which could be adversely affected if the budget deficit is not addressed properly. Treasury officials expect 1996’s growth rate to be just under 5%.

The cost of peace, and more specifically, the cost of redeploying the IDF in the West Bank, were the central issues addressed during the early cabinet meetings. The Finance Ministry was trying to reconcile the Defense Ministry’s requests for additional allocations with the need to reduce overall budget spending in order to reduce its percentage of the deficit.

According to Religious Affairs and former Economics and Planning Minister Shimon Shetreet on Israel Radio 16.7.95, the cost of redeployment maybe as being as high as NIS 7 billion. However, most reports have estimated the cost of redeployment which includes moving IDF bases, increased boundary security measures, and the hiring of new security services personnel, among others to be between NIS 1.5 billion and NIS 3 billion. The figure of NIS 2.5 billion is most often cited by reports

(Globes, Ha’aretz 26.7.95), although a source in the defense establishment said recently that an initial figure for redeployment was approximately NIS 1.5 billion.

In fact, the outcome of the negotiations during the week of 23-28.7.95 between Defense Ministry officials and the Treasury, ended with the IDF agreeing to decrease its request to cover the cost of redeployment, called the Rainbow 2 program, to NIS 850 million, from NIS 950 million; part of ultimate cost of NIS 1.6 billion. (Ha’aretz, 28.7.95). Earlier in the week, meetings were held between Finance and Defense Ministry officials, IDF staff, and the Prime Minister in an attempt to resolve the differences between the request of the defense establishment and the Treasury demand to reduce the 1996 budget. The Defense Ministry requested an additional allocation of NIS 2.5 billion, while the Treasury demanded a NIS 600 million cut in defense spending. (Globes, 25.7.95) The cuts could be spread out over a number of years without hurting the redeployment effort, according to Treasury sources (Ha’aretz, 26.7.95).