REINING IN THE BALLOONING DEFICIT, NOT IN THE U.S., BUT IN ISRAEL

Israeli cabinet members are working on budget cuts, including reductions in defense spending, and an increase in taxes to bring a ballooning deficit under control. Is there a lesson here for the U.S. Congress?

FINANCE, DEFENSE MINISTERS TACKLE BUDGET CUTS TOGETHER
Finance Minister Yair Lapid wants to cut 5 billion shekels ($1.4 billion) from Defense Minister Moshe Ya'alon's budget in light of immense deficit • Defense Ministry: Cuts will recognize "over-arching security needs and the threats posed by the changes in the region"

By Ze'ev Klein and Lilach Shoval

Israel Hayom
March 29, 2013

Finance Minister Yair Lapid and Defense Minister Moshe (Bogie) Ya'alon met Thursday in Tel Aviv to try to overcome the disagreements over cuts to defense spending would be cut as part of the ongoing budget negotiations.

The meeting followed a meeting between Lapid and Prime Minister Benjamin Netanyahu just before Passover, at which they agreed in principle that the defense budget would have to be cut. Netanyahu, Lapid, Ya'alon, and Israel Defense Forces Chief of General Staff Lt. Gen. Benny Gantz are expected to make a final decision after the Passover recess.

At the end of the Lapid-Ya'alon meeting, the Defense Ministry issued an unusual statement, stating that the two ministers had agreed to form a joint task force that would iron out the outstanding issues on the defense cuts. The decisions would "be tailored to meet long-term needs and would reflect the complex state of the economy and the budgetary deficit, but on the other hand, they would recognize the over-arching security needs and the threats posed by the changes in the region."

The Finance Ministry is hoping to rein in the ballooning deficit by cutting overall government spending by as much as 30 billion shekels ($8.2 billion) over the next 18 months, including 4.5-5 billion shekels ($1.3-$1.4 billion) from the supplemental defense budget. Officials in the Finance Ministry's Budget Department also want to cut the length of mandatory military service Israeli men have to perform by six months to around 30 months (at least in some units), abolish certain benefits IDF career officers enjoy and merge Defense Ministry and IDF offices abroad.

The Finance Ministry's budget proposal will likely call for a higher value-added tax rate (it may rise from 17% to 18% as early as July), a move which would generate an estimated 2.1 billion shekels ($577 million) in tax revenue in 2013 and a further 4.2 billion shekels ($1.15 billion) in 2014. Despite being a regressive tax, VAT involves an easy tax collection mechanism.

The Finance Ministry would also like to apply VAT to vegetables and fruit, as this could add some 2.3 billion shekels ($637 million) in new revenue each year, and abolish the VAT-free zone in Eilat, which would likely yield 500 million shekels ($137 million) in new revenue annually. Lapid is expected to present Netanyahu with the new austerity measures next week. Netanyahu and Bank of Israel Governor Stanley Fischer reportedly see eye-to-eye on budgetary matters.