The gap in the 2016 budget is likely to be smaller than expected, according to preliminary discussions of the state budget by the Ministry of Finance that began this week. Despite the reports of the Prime Minister's wish for a triennial budget, as of now the Ministry of Finance is preparing a budget for only 2015-2016. Sources inform "Globes" that in the discussions taking place this week the possibility of using a box - an unconventional fiscal tool making it possible to exempt major one-time expenses from the budget spending restriction - was repeatedly mentioned.
The Ministry of Finance budget department is still talking about a budget gap amounting to NIS 10-12 billion that the department will have to "close," whether by cutting or postponing government spending or by raising taxes and eliminating tax exemption. This is significantly less than the NIS 20 billion gap predicted by the budget department up until a few weeks ago and the NIS 16 billion gap predicted by the Bank of Israel in April
The main reason for the lower than expected gap is the upward revision in the tax revenue forecast and the elimination of the necessity for adjusting prices. Furthermore, the mechanism for adjusting the government's spending to its liabilities will probably be less painful than previously thought.
Required adjustments
The smaller-than-expected budget gap appears to support the position of Ministry of Finance Accountant General Michal Abadi-Boiangiu, as opposed to the more cautious view of Ministry of Finance budget director Amir Levy. The two officials have disagreed on the matter in the past during the large meeting convened two months ago in the Prime Minister's Office at the initiative of Minister of Finance Moshe Kahlon, who wanted to understand the fiscal situation he would have to deal with before becoming Minister of Finance. At that meeting, Abadi-Boiangiu asserted that the volume of the spending cuts needed was 50% less than what Levy presented, among other things because the Ministry of Finance had unused budget reserves. The budget director has the final authority and responsibility in this matter.
According to the official Ministry of Finance 2016 forecast, published during the preceding government's term, "adjustments" totaling NIS 5.6 billion will be needed next year. This forecast assumed that government spending will be limited by a NIS 342.9 billion ceiling, and that the budget deficit target will be 2.75%. At the beginning of the discussions about the budget preparations, the budget department demanded that prices be "adjusted," and that the spending ceiling be lowered by 1.5%, amounting to NIS 5 billion, because the forecasts were based on a 1.5% inflation rate, while inflation was actually -0.2%. Acceptance of this demand is not expected, among other things because according to the Bank of Israel, lower-than-forecast inflation does not require an adjustment of prices.
In recent weeks, the budgets for the coalition agreements promising the political parties various undertakings amounting to NIS 8-9 billion in 2016 were added to the budget gap. Another large addition could come from the defense budget, which is likely to grow by NIS 3-4 billion this year. On the other hand, Ministry of Finance chief economist Yoel Naveh is due to revise the state tax revenues forecast, because it is clear that the current forecast is too conservative. According to the revised Ministry of Finance figures, tax revenues totaled NIS 114.4 billion in January-May, a 4.9% nominal increase, compared with the corresponding period last year.
Dispute between the Accountant General and the Budget Director
A meeting this week led by Ministry of Finance director general Shai Babad featured sharp exchanges between Abadi-Boiangiu and Levy about the defense spending figures. A revision of the state budget performance figures published this week by Abadi-Boiangiu shows that defense spending grew 9.1%, compared with the corresponding period last year - almost double the 4.6% increase in spending by the civilian ministries.
These figures drew complaints from Levy and other senior Ministry of Finance officials, who said that defense spending should not be rising so sharply under a continuation budget, at a time when no exceptional defense events occurred. By law, in the absence of an approved budget, the Accountant General should manage the distribution of the temporary budget, whose size is determined by one twelfth of the most recent approved budget the 2014 budget.
The figures published by the Accountant General show that during the first five months of the year, defense spending totaled NIS 26.5 billion, amounting to over NIS 63 billion in annualized figures, while the original 2014 defense budget was NIS 51 billion.
Published by Globes [online], Israel business news - www.globes-online.com - on June 11, 2015
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