The Ministry of Finance has told Ministry of Defense heads that it will agree to a reduced cut in the defense budget to finance the Trajtenberg committee recommendations provided that the Ministry of Defense opens up its double financial system, allowing transparency and control, and complies with multiyear budget limitation measures in line with the Brodet committee format.
Ministry of Finance officials also told their counterparts at the Prime Minister's Office that without a genuine, multiyear contribution from the defense budget, it would not be possible to implement the Trajtenberg committee recommendations. Minister of Finance Yuval Steinitz has made similar statements.
The Ministry of Finance is currently demanding an immediate NIS 3-4 billion cut in the defense budget. Calculations by Accountant General Michal Abadi-Boiangiu and Budget Director Gal Hershkowitz show that changes in the tax mix and the reduction in indirect taxes in exchange for higher direct taxes will not be enough to finance the change in priorities that the Trajtenberg committee will propose.
Prime Minister Benjamin Netanyahu and Prof. Manuel Trajtenberg have asked outgoing Prime Minister's Office director general Eyal Gabai, a Trajtenberg committee member, to coordinate the cutting of the defense budget to finance the Trajtenberg committee recommendations. Feverish discussions have been held in the past days, accompanied by mutual recriminations.
The last meeting was held in Gabai's office on Monday, called before Gabai went on reserve army duty ahead of his departure from office. Officials from the Ministry of Finance, the Ministry of Defense and the IDF attended the meeting. The next meeting is scheduled for next week.
It emerged from the discussions revealed that the Ministry of Defense has a computerized budget system with a different budget base from the one approved by the cabinet and the Knesset. In effect there are two sets of books, one held by the Ministry of Finance, the Knesset Foreign Affairs and Defense Committee, and the National Security Council, and a second set used by the Ministry of Defense and the IDF.
The defense establishment's base budget in its own financial system is significantly larger than the base approved by the Knesset, and it is based on different formulas, created by the Ministry of Defense, for calculating long-term allocations and expense estimates.
One result is that is impossible to monitor and control the budget activity of the Ministry of Defense and the IDF. Worse than that, it enables the Ministry of Defense to create new commitments, to sign contracts and deals, even long-term ones, with no real budget coverage.
In such a situation, when the time comes to pay suppliers, and there is in fact no budget coverage, the Ministry of Defense turns to the Ministry of Finance, and defense minister comes cap in hand to the prime minister, claiming that there is no money to pay strategic suppliers, such as the Americans, Israeli defense contractors like Israel Aerospace Industries Ltd. (IAI) (TASE: ARSP.B1) and Rafael Advanced Defense Systems Ltd., as well as small suppliers who are liable to go bankrupt. This is one of the reasons that, in the course of the year, year, every year, supplements are added to the defense budget.
It should be pointed out that this practice occurs at no other ministry.
In the latest round of talks, Hershkowitz kept repeating, "I don’t know what goes on in the defense budget." Abadi-Boiangiu said, "It's unacceptable that the Defense Ministry comptroller is blind about the budget."
They repeatedly made demands for transparency, oversight, a single defense budget, massive budget cuts, and streamlining.
For their part, Ministry of Defense officials made harsh countercharges against the Ministry of Finance, alleging that signed agreements were not honored, that the ministry was delaying settling accounts related to Operation Cast Lead, and that the defense budget needed a supplement of several billion shekels on top of the NIS 55 billion budget for 2011, because of recent geopolitical events and consequent risks.
Ministry of Defense director general Udi Shani said, "Everyone has to know that life comes before quality of life."
Hershkowitz retorted, "Threats and risks are part of our lives here. There is no war now, and you cannot demand wartime conditions. If, Heaven forbid, there is a war, the calculations will change, just as, conversely, they will change if there is a severe economic crisis here."
According to Ministry of Finance calculations, the defense budget has exceeded the Brodet formula by NIS 8-10 billion, and it is already known that the 2012 defense budget base will be NIS 2.5 billion over the limit. Ministry of Defense officials said in response that, according to their calculations, the budget has been continually eroded, including in comparison with the Brodet formula.
An independent set of calculations by the Bank of Israel was presented at the meetings, showing that the defense establishment has exceeded the Brodet formula by several billion shekels, irrespective of the cost of the social demands expected from the Trajtenberg committee.
The Ministry of Finance said in response, "Transparency is the foundation of management of the public's money."
The Ministry of Defense said in response, "The ministry rejects the Ministry of Finance's claims, and it has no intention of carrying on a populist and superficial debate in the media. The Ministry of Finance's claims reflect social disconnect and ignorance, and the real objective behind these claims is to torpedo the Trajtenberg committee and ignore social distress by putting the blame on the Ministry of Defense."
The Ministry of Defense added that its budget "is monitored and overseen by the Ministry of Finance, and an agreement was signed in 2009 between the defense establishment and then-budget director Yaron Zelekha, which settled the issue of transparency, and is valid through 2017. We have no intention of discussing transparency with the Ministry of Finance. The improper attempt by Ministry of Finance officials to mislead the public and pressure decision-makers via the media is utterly unacceptable."
Published by Globes [online], Israel business news - www.globes-online.com - on September 14, 2011
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