Kahlon Blames Coalition Agreement for Budget Bust

Finance Minister Moshe Kahlon said on Monday that coalition agreements calling for heavier government spending have necessitated an upward adjustment of the projected budged deficit, Globes reported.

The Ministry of Finance presented a series of revisions on Monday which it said were needed to close an 18 billion shekel hole in the 2017 budget caused by various promises to political parties.

To close the gap, the Ministry raised the target for the deficit to GDP ratio from 2.5 percent to 2.9 percent in 2017 and from 2.25 percent to 2.9 percent in 2018.

This would be the first such increase since 2002. But the Ministry maintains that the ratio will resume its decline in 2019, when the deficit target will be 2.5 percent.

The Ministry decided on another across-the-board cut in ministerial operational and procurement budgets, aimed at saving NIS 2 billion.

The ministry also reached agreement on Sunday with the Histadrut on postponement of the pay rise promised to public sector workers. Under the pay agreement, the salaries of public sector employees were to have risen in three stages in 2017: by 1.5 percent in January; 1.75 percent in June; and 1.5 percent in December. Under the adjustment, the first two stages will each be deferred for six months, while the third stage is deferred to March 2017 and will rise to 1.75 percent.

The total pay rise in the public sector will thus grow from 7.5 percent to 7.75 percent. The Ministry of Finance says that the agreement with the Histadrut will make it possible to reduce budget spending in 2017 by NIS 2 billion.

Globes termed the agreement a “in effect a loan that the Histadrut is granting to the Ministry of Finance for which it is charging 0.25 percent interest. A simple calculation by one economist today shows that 0.25 percent on a pay rise of 1.5 percent is actually an annual rate of interest of 12.5 percent, a rate more suited to the grey market.”

Meanwhile, breaches of the spending ceiling will amount to 5.1 percent in 2017 and 3.1 percent in 2018, which lend support to the Bank of Israel’s assertion that the current spending ceiling is obsolete. In a recent position paper, the Bank called it a “dead letter” and said that some new mechanism is needed to curb spending excesses harmful to fiscal health.