MOMENTUM BUILDS FOR HIGHER SPENDING

C O N F I D E N T I A L SECTION 01 OF 03 TEL AVIV 003336

SIPDIS

SIPDIS

NEA FOR PO, NEA/IP FOR GOLDBERGER, SHAMPAINE, ZIMMER,

EEB/IPS FOR DIBBLE, GARRY

NSC FOR WATERS

TREASURY FOR HIRSON

E.O. 12958: DECL: 11/20/2017
TAGS: ECON EFIN PGOV PREL IS
SUBJECT: MOMENTUM BUILDS FOR HIGHER SPENDING

CLASSIFIED BY: AMBASSADOR RICHARD H. JONES FOR REASONS 1.4(B) AND (D)

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Summary
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1. (C) Playing to public concern about the large gap
between Israel's rich and poor, Avishai Braverman, a
Labor Party Knesset member, submitted a bill to the
Knesset to significantly raise Israel's year-to-year
budget expenditure increase ceiling from the present 1.7
percent, starting with the 2008 budget. While the GOI
has been considering increasing spending from 2009
onwards as a way to deal with the perceived need for more
defense and social welfare spending, it strongly opposes
any move to change the 2008 budget, which is based on a
1.7 percent spending increase as agreed to with the U.S.
in the framework of the Loan Guarantee Agreement, and
which is well on its way to approval. Opposition Likud
leader Benjamin Netanyahu told the Ambassador that he
strongly opposes passage of the bill, even though his
party has urged him to sign on as a way to embarrass the
government and benefit himself politically. The Ministry
of Finance (MoF) also strongly opposes the bill and is
doing everything it can to prevent its passage. Many
other key figures, such as Bank of ISRAEL (BoI) Governor
Stanley Fischer have also spoken out against raising the
expenditure ceiling now. The discussion about increasing
spending comes at a bad time. Many international credit
rating agencies are now in the process of doing their
annual assessments of Israel's credit rating. End
Summary

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Braverman Surprises the GOI
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2. (C) Avishai Braverman, Labor Party member of the
Knesset Finance Committee, economist, and former
President of Ben Gurion University of the Negev, proposed
a private member's bill to the Knesset late on November
19 calling for an upward revision in the ceiling for
year-to-year budget expenditure increase. This surprise
move caught the government and the financial and business
communities off-guard and put ex-Finance Minister and
Likud opposition leader Benjamin Netanyahu into an
awkward position. According to press reports, for 2008,
the bill calls for an increase from the present 1.7
percent increase to a 2.5 percent increase. Starting in
2009, it calls for expenditures to rise by two thirds of
the economic growth rate of the prior year or by the rate
of growth of the population in the prior year, whichever
is greater. In the wake of the greater attention being
paid recently to social welfare issues - partly as a
result of the 36-day-and-counting high school and middle
school teachers strike, there appears to be widespread
support in the Knesset for the legislation and in the
Knesset Finance Committee as well, with one count showing
a majority of the Finance Committee in support and at
least 69 members of the entire Knesset indicating they
would vote for the bill.
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Braverman Puts Bibi on the Spot
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3. (C) In a November 20 conversation with the
Ambassador, Netanyahu sounded very alarmed at the
prospect that the bill could pass. He said that the call
to raise the expenditure ceiling contravenes an explicit
Israeli commitment to the U.S. made in the framework of
the Loan Guarantee Agreement to limit the ceiling to 1.7
percent and urged the U.S. to indicate its opposition to
the passage of such a measure. He also said that he
personally strenuously opposes the measure - as it would
threaten to undo the work he did as Finance Minister in
the Sharon government instituting a new culture of fiscal
restraint. "Once they go from 1.7 percent to 2.5
percent, it will be impossible for them to stop there.
Every special interest in the country will join the
campaign for more spending," he predicted. However, he
is under heavy pressure from fellow Likud members not to
oppose the bill, as it will be popular with the Party's
rank-and-file and the embarrassment to the government

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would benefit the Likud. He added that he wants the bill
quashed, but he will not be the one to do it. (Comment:
Likud members remember that Netanyahu's fiscal policies
cost the Likud the support of its core backers in the
lower socio-economic stratum and in the periphery in the
last elections. They do not want to remind the
electorate of this by having Netanyahu take a public
stand now in favor of fiscal responsibility. End
Comment).

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MOF: Very Bad Idea, Really Crazy
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4. (C) Michal Finkelstein, Senior Advisor to the MoF DG
told Deputy EconCouns that the Braverman bill is a "very
bad idea, really crazy." She said that the guiding
principle of the GOI's economic policy is fiscal
responsibility, controlling spending, and budget
discipline. Opening up the 2008 budget to revision now
would cause terrible problems. Finkelstein indicated
that this is extremely unlikely since the cabinet has
already approved the 2008 budget and it has also passed
its first reading in the Knesset. She noted that
"everyone in the ministry is doing everything in his
power to stop this," adding that BoI Governor Stanley
Fischer strongly opposes the bill, as does the Head of
the National Economic Council Manuel Trajtenberg. She
reported that yesterday, Finance Minister Bar-On ran into
Braverman in the Knesset and "accused him to his face of
acting like a populist demagogue." She did not know if
Braverman responded. Asked whether the bill could pass,
Finkelstein said that since outsiders cannot directly
impact what happens in the Knesset, she could not give a
definitive response. She reiterated that the government
strongly opposes it and is doing everything it can to
prevent its passage.

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BOI, PMO Strongly Oppose
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5. (C) The Braverman bill's submission has received
relatively little coverage in the press, but numerous
economic and financial leaders have spoken out in
opposition to the concept, among the most important being
Fischer, who said that while a small increase in spending
would do no harm, instituting large increases would
endanger the GOI's ability to borrow on the international
markets at reasonable rates during the next recession -
which will inevitably come. He also said that it is
important for ISRAEL to keep its commitments to both
itself and others, an implicit reference to Israel's
commitment to the U.S. to restrain spending in the
context of the Loan Guarantee Program. The Prime
Minister's Office issued a press release indicating that
reopening such a fundamental discussion with regard to
the 2008 budget is a non-starter and will not be
considered. However, it mentioned that longer term, the
National Economic Council is studying how to change the
budget framework to reduce the gap between the rich and
the poor while maintaining a policy of fiscal
responsibility.


6. (C) Former Ministry of Finance (MoF) DG Yossi Bachar
said in a lecture last week that any move to raise the
budget ceiling requires consultation with Washington, as
the LGA with the U.S. commits ISRAEL to maintain the 1.7
percent budget ceiling. (Note: This contrasts sharply
with GOI actions when Bachar was MoF DG and Olmert
Finance Minister during which time ISRAEL unilaterally
raised the budget ceiling from 1 to 1.7 percent, before
later seeking retroactive approval from the U.S. -
successfully. End Note). MoF Budget Director Kobi Haber
is quoted in the press as saying that proposals such as
Braverman's harm Israel's economic credibility. Other
unnamed sources in the MoF are quoted saying that
increasing the budget ceiling without consulting the U.S.
will harm the economic confidence between the two sides.
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Bad Timing: Israel's Rating Under Review
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7. (C) Braverman's move comes at a time when
international rating agencies (Standard and Poors, Fitch,
Moodys) are doing their annual assessments of Israel's
credit rating. An overt move to increase spending could
damage Israel's long-running efforts to increase its
rating, although many economists maintain that such an
improvement would yield only marginal benefits to ISRAEL
in the international bond markets, reducing the rate at
which ISRAEL can borrow only very slightly - not enough
to be a driving factor in Israel's spending decisions.

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Comment
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8. (C) The 2008 budget - which adheres to the 1.7 percent formula -
has already been approved by the cabinet and passed its first reading
in the Knesset. It is now with various Knesset committees for fine
tuning before final passage which is supposed to happen by the end of
the year. For a fundamental change such as that proposed by Braverman
to be acted upon in time to affect the 2008 budget, it needed to be
proposed and debated long ago. Passage of the bill would be a severe
embarrassment for the government, which will likely take extreme
measures to prevent it, if necessary. It would also call into question
the stability of the Coalition, since the bill was submitted by a
member of the Coalition. Regardless, the bill's resonance is an
indication of what lies ahead, and the difficulty the GOI will have
maintaining its policy of fiscal responsibility in the face of strong
public pressure to narrow the gap between the rich and the poor through
social welfare programs. Since the Netanyahu economic reforms, the
economy has performed spectacularly, but the perception persists that
the lowest socio-economic sectors have been left behind. While their
economic situation has in fact improved, the wealthy have clearly
benefited the most. Even many in the MoF and the BoI support
increasing the budget expenditure ceiling in the outlying years beyond
2008 to enable the country to prudently take advantage of its growing
economy to meet its social and defense needs. Dealing with these
problems while continuing to control spending and maintaining strong
growth will be one of the most important challenges to face Israel's
government in the next few years. End Comment JONES