MOF DG ON ISRAELI ECONOMIC POLICY

C O N F I D E N T I A L SECTION 01 OF 03 TEL AVIV 003670 SIPDIS NEA/FO FOR DANIN; NEA/IPA FOR WILLIAMS, WAECHTER; EB/FO FOR DIBBLE; EB/OMA FOR GARRY; NSC FOR WATERS; TREASURY FOR HIRSON E.O. 12958: DECL: 09/13/2016 TAGS: ECON EFIN PGOV PREL IS SUBJECT: MOF DG ON ISRAELI ECONOMIC POLICY Classified By: Ambassador Richard H. Jones for reasons 1.4 b and d. -------------- Summary -------------- ¶1. (C) Ministry of Finance (MOF) DG Yossi Bachar says that Israeli politicians understand the need to maintain a policy of fiscal restraint. The policy is not dependent on individuals, but on market forces, which punish deviations from that path. He is worried about the government's longevity (please protect),but has no plans to leave his job. Infrastructure projects and transfer payments will be cut, as will discretionary spending in most ministries -- except health and education -- to provide for increased defense spending over the next three years. Bachar said that the post-war recovery in the north was almost instantaneous and added that there will be GOI money available for development of the Galilee, augmented by American Jewish philanthropic contributions. He stated that there are no plans to request special assistance from the U.S., but noted that aid would be welcome if Washington signaled that it would respond positively to a request. Regarding settlement spending, Bachar said that, while there are no specific plans to make cuts, such spending will be squeezed along with everything else. He welcomed the establishment of the new Economic Advisory Council in the PM's office, and did not think it represented a threat to the power of either the Bank of Israel (BOI) or the MOF. End Summary. -------------- Defense Spending Increased -------------- ¶2. (C) EconCouns and DepEconCouns met on September 12 with MOF DG Yossi Bachar and his Senior Adviser Roni Loebenstein to deliver a demarche regarding the U.S.- Israel Loan Guarantee Agreement (reported septel). In a follow-on discussion about the 2007 budget, Bachar said that the full cost of the Lebanon War has not yet been determined, but looks to be somewhere between USD 3-3.5 billion (about NIS 15 billion),of which USD 2.2-2.3 billion will have been spent by the military. He estimated it may require an additional USD 2 billion to refurbish the army and prepare it for the next round of fighting. Of the approximately USD 1 billion in civilian costs incurred during the war, about twenty percent will go towards rebuilding homes, businesses, and property that actually sustained physical damage; the rest will go for compensation for lost economic activity. Bachar noted the number of compensation requests is quickly declining and remarked that recovery in the north was virtually instantaneous, with few signs still visible to indicate that the region had just been on the front lines of a war. Tourism, so important to the north's economy, recovered quickly, with the region's bed and breakfast establishments filled with internal (Israeli) tourists within days of the end of the fighting. (Note: It will take considerably longer for foreign tourists to return en masse. End Note). ¶3. (C) Bachar said that there is a big debate raging over what is necessary to prepare the army for another war, but the resolution of the question would not come until well after the 2007 budget is approved. For now, it has been decided to spend an extra NIS 8.2 billion (USD 1.86 billion) over three years on the military -- NIS 2.5 billion in 2006 and again in 2007, and about NIS 3 billion in 2008. -------------- No Plans for Aid Request -------------- ¶4. (C) Regarding a possible aid request to the U.S. to help cover war expenses, Bachar said that for practical purposes "it's not happening." If there were a realistic chance to get some aid, Israel would be eager to "jump on it." However, the process would have to begin at the political level with an indication from Washington that an aid request would be viewed positively. As the head of the professional team which would prepare an aid request, Bachar said that he could state authoritatively that the GOI is not working on preparing such a request now. -------------- Cuts in Transfer Payments -------------- ¶5. (C) To cover the increased defense expenditures, Bachar said that there would be cuts in other areas. He had met with Minister of Industry, Trade, and Labor Eli Yishai (of Shas) to discuss delaying a scheduled cost-of-living increase in child allowances and other transfer payments. Putting off the 1.65 percent increase on NIS 40 billion (about USD 9 billion) in payments saves the government almost NIS 700 million (about USD 160 million). (Note: Yishai was clearly unhappy with the outcome of that discussion, as all four Shas ministers voted against the budget in the Cabinet vote later that evening. End Note) Bachar also noted that infrastructure spending would be reduced, although he did not go into specifics. -------------- Galilee Development will be Funded -------------- ¶6. (C) Bachar denied that there were to be simple "across the board cuts" in ministries' budgets, as the media had been reporting. He said that ministries generally spend only about 98 percent or so of their allotted money during the year, and that this extra money is what will be taken for defense. In addition, the purchasing budgets for all ministries but health and education will be cut, but money for salaries will not be touched. When the EconCouns asked about money for Negev-Galilee Development, Bachar said that this was not really being cut. The government intends to spend about NIS 1.5 billion for Galilee development (with a bit of it for the Negev as well),and get additional money from American Jewish philanthropic organizations such as the United Jewish Communities (UJC). -------------- No Special Money for Settlements -------------- ¶7. (C) In response to EconCouns question on spending for settlements, Bachar said that the money spent in the territories is spread out among all of the ministries, and that there is no special money allotted for settlements. When the EconCouns reiterated USG concern about money being spent on settlements, especially at this time of increasing fiscal difficulty, Bachar said that the GOI does not support building more settlements, or investing in major new infrastructure projects such as highways in the territories. While Israeli citizens living in the territories are entitled to whatever other Israeli citizens receive, Bachar said that spending on settlements might be reduced as a result of the pressure to spend on defense. -------------- Economic Advisory Council No Threat -------------- ¶8. (C) Regarding the new Economic Advisory Council, Bachar said it is headed by a good economist (Note: Manuel Trajtenberg of Tel Aviv University; PHD, Harvard 1984. End Note),and that it is being established because the PM wanted to have an economic affairs advisory group close at hand. The goal is for it to be the economic equivalent of the National Security Council. Bachar said he is not sure what the new body will be able to contribute, but was sure that it would not take power away from either the Bank of Israel (BOI) or the MOF. The BOI is independent and the presence and personality of Governor Stanley Fischer is a major factor in enhancing the perception of Israeli economic stability outside the country. He noted that when Fischer speaks, Cabinet members listen. As for the power of the MOF, Bachar said that it would take a very powerful PM and a very stable government to reduce it in any meaningful way. -------------- -------------- Government Unstable but Fiscal Stability Entrenched -------------- -------------- ¶9. (C) This led Bachar to remark off-the-record (please protect) that he is deeply concerned at the weakness of the government, fears for its stability, and thinks that it could easily fall and bring on new elections. Asked about his own future and about how much continued fiscal discipline depends on him, Bachar said that he has no plans to leave. He added that personalities are important, but policy is not heavily dependent on individuals. The Israeli economy is on track to be competitive in the world market. If it deviates from that track, it will be punished by investors and be forced to turn back. He added that the economy has been moving in more or less the same direction for the past twenty years, and that Netanyahu did not "invent the wheel." He succeeded as Finance Minister by refusing to compromise on important economic principles. Politicians can be wrong, but the economy is always right. Now, things are still moving in the right direction. This is not to say, however, that there are not some very problematic issues that need attention. Bachar went on to note that even (DefMin and former labor boss) Amir Peretz does not want to bust the budget framework. Even those who oppose the budget do so at the margins and do not attempt to change the fundamental principles of the economic growth policies. At heart, people understand that fiscal restraint is the correct policy, and want to figure out a way to properly deal with issues of social concern. ********************************************* ******************** Visit Embassy Tel Aviv's Classified Website: http://www.state.sgov.gov/p/nea/telaviv You can also access this site through the State Department's Classified SIPRNET website. ********************************************* ******************** JONES