Jerusalem, 28 November 1995

BACKGROUND ON 1996 BUDGET

(Communicated by GPO Economics Desk)

During December, the Knesset will begin debate on the 1996 budget which must be passed by the end of the month.

One of the major questions currently being discussed in the Knesset, in the government, and the economic press’s assessment is whether Finance Minister Avraham Shohat will be able to limit the budget’s total spending and its allocation framework, or whether a budget increase or a change in its structure will be necessary. Factors affecting the decision include pressures to increase both peace process/security spending and social services spending.

As it stands now before the Knesset debate and the second and third readings needed before becoming law budget spending will be NIS 172.7 billion, with an additional NIS 8.4 billion in spending conditional upon revenues. Budget spending will increase, in real terms, by 8.6% compared to the 1995 budget and general spending will increase by 3.1%, excluding repayment of the principle on debts. The 1996 budget, excluding debt repayment, will be NIS 145.6 billion.

The budget is divided into three major categories: regular, development and investment, and debt repayment to the Bank of Israel. The regular budget of NIS 123.5 billion covers Government institutions, defense spending, the local authorities and social services’ budgets. The development and investment budget for 1996 will be NIS 47.5 billion, and includes investments and development in social services and economic sectors. Debt repayment to the Bank of Israel for repaying loans and interest will be NIS 1.6 billion.

The Government’s main goals in the 1996 budget are to achieve stable growth, a decrease in unemployment, absorption of 70,000 new immigrants, and stabilize the country’s balance of payments deficit in order to enable its reduction in later years. A number of sectorial problems will also be dealt with in the budget. These include the long-term crises surrounding the kibbutzim debts, the defense industries, and the health funds. Further aims of the 1996 budget consist of spending: to implement "Rainbow 2," redeployment in the West Bank; on more housing and construction and on improved social services for the weaker elements in the population; on assistance for investments and research and development; and on aid to minority populations.

The six ways in which the Government will work towards achieving its goals will be by: making large investments in economic infrastructure and education; reducing taxes; creating structural changes in certain sectors to increase competition; privatizing Government-owned enterprises; reducing the budget deficit; and reducing the budget’s component in the Gross Domestic Product.

The 1996 budget will be divided in the following ways: defense spending 16.4%, debt repayment 32.2%, transfer payments and supports 28.4%, civilian spending 16.4%, and investment and credit 6.6%. Ten years ago, in 1986, the breakdown was: defense spending 24%, debt repayment 40%, transfer payments and supports 21%, civilian spending 10.2%, and investment and credit 4.8%.

Revenues into the Government budget are expected to be broken down as follows: direct taxes 45.6%, indirect taxes 37.9%, grants from abroad 8.1%, and other revenues 8.4%. The budget deficit in 1996 is planned to be 2.5% or NIS 10.8 billion, compared to the planned 2.75% in 1995, according to Finance Ministry expectations. The NIS 10.8 billion deficit is scheduled to be financed by the sale of Government-owned companies, at NIS 3 billion; loans from abroad, NIS 2.2 billion (this includes loans based on U.S. Government loan guarantees); and loans from the Israeli and foreign public, NIS 5.6 billion.

The peace process, according to the Finance Ministry, is budgeted a total of NIS 2.8 billion spread out over 1994-98. The ministries primarily receiving this section of the budget include Defense, Public Security, Agriculture, and Foreign Affairs.

Spending on social services will equal NIS 67.4 billion in 1996. This is broken down as follows: national insurance 33.8%, education and Culture 25%, support to health funds 17.6%, higher education 5.3%, Health Ministry 4.7%, labor and welfare 3.7%, absorption 2%, and others

7%.