Kahlon Fires Opening Shot in 15 Billion Shekel Row with Flug

Israeli Finance Minister Moshe Kahlon, shown here speaking during a Labor, Welfare and Health Committee meeting at the Knesset on March 23. (Yonatan Sindel/Flash90)
Israeli Finance Minister Moshe Kahlon, shown here speaking during a Labor, Welfare and Health Committee meeting at the Knesset on March 23. (Yonatan Sindel/Flash90)

Discord returned to the highest echelons of Israel’s financial leadership on Wednesday as Finance Minister Moshe Kahlon accused Governor of the Bank of Israel Karnit Flug of a deliberate 15 billion shekel overestimate of the 2015-16 state budget deficit, Globes reported.

The comment, made at an Israel Bar Association conference in Eilat, came after a year of pacific relations between Kahlon and Flug, now probably at an end.

Kahlon was asked by a journalist about the BoI’s criticism of the buyer fixed price plan that he had initiated to help bring down housing prices.

“I want to ask you what my attitude should be,” Kahlon answered. “I began my job, and I began to compose the 2015-2016 budget. The Bank of Israel told me, ‘The Minister of Finance won’t get the budget through without NIS 8 billion more in taxes.’ I almost believed it, and it turned out that my predecessors also believed what they were told.

“I heard what they said. I discussed it with the Ministry of Finance heads, the Israel Tax Authority, the State Revenue Division – there was no need – none at all. They pressed me again to raise taxes. I checked it out – it wasn’t necessary, so I decided not to raise taxes. Then they hit me with, ‘The budget deficit will rise to 3.4 percent!’ I didn’t raise taxes. I cut taxes by NIS 7 billion.

“She [Flug] made a NIS 15 billion mistake. I cut VAT by NIS 5 billion, corporate tax by NIS 2 billion, plus the NIS 8 billion in taxes hikes I refused to make – and the deficit ended at 2.1 percent. Now she says that if I don’t do A, B, and C, the 2016 deficit will be 3.5 percent. The quarterly deficit now is 2.2 percent.

“When I cause a deficit, I put the Israeli economy at risk, but on the other hand, when I cut spending, I harm Israelis – I harm welfare, health, and education. I decided to expand the budget for civilian agencies. The army will get what it should, and now we said, ‘Let’s start taking care of health and education.'”

Klug’s office did not return fire, but Globes noted that in response to past similar criticism, Bank of Israel sources said, “The Governor did not call for tax increases in 2015, and as is known, the problem in 2016 was solved by raising the deficit target. The numerator at the Ministry of Finance itself is showing the depth of the pit the government will have to deal with in 2017.”

When Kahlon was asked if he was questioning her understanding of economics, he said, “She understands very well. I’m probably the one that doesn’t understand. I’m a politician.”

Kahlon then proceeded to tick off a number of issues on which his superior grasp of economics prevailed in discussions with Flug.

“When we began the coalition agreement, I sat down with the prime minister and told him, ‘Look, in my campaign, I talked about bank reform. We have to get more banks here.’ She told the prime minister we didn’t need more banks. [Fortunately] she was convinced, and said we needed more banks. She said there was no need to reduce the capital adequacy requirements for small banks. She was convinced, and now we’re lowering them. She said we mustn’t have depositors’ insurance. She was convinced, and we’re creating depositors’ insurance. So I hope that here, too, she will see the figures and be convinced. After all, the figures don’t lie.”

Kahlon was also asked about predictions of mass resignations among bank executives following a Knesset proposal for salary restrictions. Asked if the executives will quit and go to work elsewhere, Kahlon replied: “Where will they go? Who will pay them? Overseas? Look at the accomplishments of all our monopolies overseas. They can’t make a dollar overseas – not one. They take the money from here, do deals overseas, lose money, and come back here, because there’s real competition there, and real regulation of monopolies.”

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