Treasury short of NIS 30b as budget deadline nears

After two and a half months, and assuming no further delays, the 2025 state budget will be submitted to the government for approval this Thursday. Although there is little time left, the package of measures presented by Finance Minister Bezalel Smotrich aimed at narrowing the fiscal deficit is still full of loopholes.

Of the NIS 40 billion list of spending cuts and other austerity measures that the Finance Ministry is seeking to include in the budget, only NIS 10 billion have been secured in principle. Measures worth about an additional NIS 10 billion are still under negotiation, while there are major disagreements over the remaining amendments worth NIS 20 billion that are not close to being resolved at the moment.

Among the main plans that the Ministry of Finance included in the draft budget, the only ones that actually got hold of it were freezing income tax brackets and tax credit points (saving NIS 2.6 billion next year) and freezing some National Insurance payments (savings estimated at NIS 3-4 billion). .

Meanwhile, the Budgets Division of the Ministry of Finance is negotiating public spending cuts with various government ministries, to release funds to be transferred to defense spending. According to Finance Ministry sources, progress is being made with a few ministries: the Ministry of Health, the Ministry of Education, the Ministry of Welfare and Social Affairs, and the Ministry of Interior. Agreement with other ministries is still elusive. There is no agreement to add to the defense budget. The gap between the Ministry of Finance and the Israeli army amounts to tens of billions.

Rely on the last minute

The list of things at risk of being cut, scaled back or out of budget is long. This includes, for example, reducing tax benefits on advanced training and pension funds, freezing old-age and disability allowances, freezing the minimum wage, and imposing a new tax on unprofitable companies. Freezing part of the increase due to public sector salaries is being discussed positively between the Ministry of Finance and the Histadrut (the General Federation of Labor in Israel), but there is no agreement yet, and the measure involves additional demands from both sides.

Finance Ministry sources admit that the situation in which almost everything remains open at this advanced stage of budget preparation is not ideal, but express their determination to insist on fiscal adjustment measures. Finance Ministry officials returned to work after the Jewish holiday season to face a pile of unfinished tasks, many of which look set to remain unfinished until the government’s traditional budget night.

The Ministry of Finance relies heavily on late-night negotiations in the Prime Minister’s Office with coalition partners, and in breakout rooms between representatives of the Ministry of Finance and representatives of other ministries. The Ministry of Finance hopes that at the last minute it will be able to achieve the goal of reducing spending, and come as close as possible to the planned fiscal deficit level of 4% of GDP, as Smotrich announced.

Even before the expected weekend nightly sparring with government ministries over cuts to their budgets, there are issues of contention between senior Finance Ministry officials and the Prime Minister’s advisors. For example, it is still unclear what will happen to two major fiscal adjustments planned by the Budget Department: a freeze on updates to the minimum wage and old-age pensions.

Many of the measures introduced by the Finance Ministry in the budget have not yet been agreed upon with Prime Minister Benjamin Netanyahu. Finance Ministry officials are scheduled to meet with the Prime Minister’s Economic Advisor Professor Avi Simhon and Director General of the Prime Minister’s Office Yossi Sheli on Sunday afternoon to formulate a package of spending cuts and austerity measures that will be included in the budget. The meeting was postponed at the last minute.

The meeting was arranged without the participation of Netanyahu himself. In normal times, Netanyahu would have led the discussion, making decisions before the government’s budget night. Due to security developments, including the counterattack on Iran, Netanyahu’s attention is mainly focused on the war, and he was not scheduled to participate in the meeting. When that is eventually done, Simhon and Shelly will present their recommendations to Netanyahu, who will have to decide what will go into the budget and what will not.

The two aforementioned measures, on the minimum wage and state pensions, aim to reduce the 2025 fiscal deficit by billions of shekels, to allow for increased defense spending. They have been criticized as stealing from the most vulnerable segments of the population.

Business is fighting a battle

One of the biggest challenges the Finance Ministry faces in reaching the NIS 40 billion target for fiscal adjustments is obtaining approval for the proposed tax on “retained earnings,” that is, corporate profits that remain undistributed for a long period of time. This measure alone aims to achieve revenues worth NIS 10 billion in 2025.

At present, there are no known objections to this measure in the government. The main battle will be in the Knesset, where business organizations will try to enlist the support of Knesset members to thwart this provision, or water it down in committee. The proposal upsets many business leaders, who will put their weight behind efforts to overturn it.

Another matter of contention between businessmen and the Ministry of Finance is the proposal to allow major cities – Tel Aviv, Jerusalem and Haifa – to change the way buildings are measured for the purposes of calculating the arnona (local property tax). Business organizations say this could lead to a 30% jump in arnona payments by companies and residents.

Published by Globes, Israel Business News – en.globes.co.il – on October 28, 2024.

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