Identifier
Created
Classification
Origin
08TELAVIV168
2008-01-18 16:04:00
CONFIDENTIAL
Embassy Tel Aviv
Cable title:  

BUDGET PASSES EASILY BUT SPENDING PRESSURE GROWS

Tags:  ECON EFIN PGOV PREL IS 
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VZCZCXRO6285
OO RUEHROV
DE RUEHTV #0168/01 0181604
ZNY CCCCC ZZH
O 181604Z JAN 08
FM AMEMBASSY TEL AVIV
TO RUEHC/SECSTATE WASHDC IMMEDIATE 5074
INFO RUEHXK/ARAB ISRAELI COLLECTIVE IMMEDIATE
RHEHNSC/NSC WASHDC IMMEDIATE
RUEATRS/DEPT OF TREASURY WASHDC IMMEDIATE
C O N F I D E N T I A L SECTION 01 OF 04 TEL AVIV 000168 

SIPDIS

SIPDIS

NEA/FO FOR DANIN, NEA/IPA FOR GOLDBERGER, SHAMPAINE,
ZIMMER, SACHAR, EEB/FO FOR DIBBLE, EEB/IFD FOR GARRY,
TREASURY FOR CONNOLLY, NSC FOR ABRAMS, DORAN

E.O. 12958: DECL: 01/18/2018
TAGS: ECON EFIN PGOV PREL IS
SUBJECT: BUDGET PASSES EASILY BUT SPENDING PRESSURE GROWS

Classified By: Ambassador Richard H. Jones for reasons 1.4 b, d.

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Summary
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C O N F I D E N T I A L SECTION 01 OF 04 TEL AVIV 000168

SIPDIS

SIPDIS

NEA/FO FOR DANIN, NEA/IPA FOR GOLDBERGER, SHAMPAINE,
ZIMMER, SACHAR, EEB/FO FOR DIBBLE, EEB/IFD FOR GARRY,
TREASURY FOR CONNOLLY, NSC FOR ABRAMS, DORAN

E.O. 12958: DECL: 01/18/2018
TAGS: ECON EFIN PGOV PREL IS
SUBJECT: BUDGET PASSES EASILY BUT SPENDING PRESSURE GROWS

Classified By: Ambassador Richard H. Jones for reasons 1.4 b, d.

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Summary
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1. (C) For the first time in years, the Israeli budget was
approved prior to the beginning of the budget year, as
required by law. The NIS 315.8 billion (USD 84 billion at
the current exchange rate of 3.75 NIS to the dollar) Israeli
government budget for 2008 passed the Knesset on December 27
by a strong 64 - 32 margin. The budget reflected a
substantial reduction in interest payments as the debt to GDP
ratio has declined to an estimated 80 - 92 percent from a
high of 102 percent in 2003. In addition, the defense budget
rose by NIS 2.9 billion (USD 773 million) over 2007 to NIS
51.3 billion (USD 13.7 billion). As per past practice, the
Ministry of Finance (MOF) proposed numerous spending cuts as
"ammunition" to be negotiated away in return for support from
the Labor, Shas, and Pensioners parties, the more "socially
oriented" factions of the coalition. Some of the provisions
that did not make it into the final budget included a
proposed health tax on housewives, a freeze on National
Insurance welfare payment increases, and various reductions
in other allowances. However, the run-up to the budget vote
featured less than the usual amount of horse trading by
various economic interests. The main exception to this was a
failed attempt by Labor MK (and professional economist)
Avishai Braverman to increase expenditures by 2.5 percent for
2008 rather than by the 1.7 percent to which the GOI
committed itself under the rubric of the U.S.-Israel Loan
Guarantee Agreement. While fiscal responsibility won out in
the end, there appears to be growing momentum towards
increasing the expenditure ceiling in the future,
particularly if the Prime Minister tries to bring the United
Torah Judaism party into the coalition. End Summary

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Reduce Rich-Poor Gap
--------------


2. (C) After four consecutive years of greater than five
percent growth in the economy, Israelis are uneasy about the
government's seeming inability to narrow the gap between the
rich and the poor. While the economic expansion has
benefited all sectors, the wealthier sector has benefited the
most. The GOI entered the 2008 budget season aware of the
public demand to redress this balance by increasing support
for the weaker sectors. Consequently, it decided to spend
more money on welfare, allowances for the elderly and for
Holocaust survivors, health care, and medication. To pay for
some of this largesse, the government advocated taxing
housewives' health-care benefits, and freezing or reducing
other allowances and National Insurance institutes payments.
At the end of the process, the government gave in on some of
these issues, canceling the "housewife tax" and most of the
proposed spending cuts. It also agreed to spend more on
fortifying the town of Sderot - next to Gaza - against rocket
attacks. Several Labor MKs, including Amir Peretz who in the
past headed the Histadrut Labor Federation and was more
recently head of the Labor Party and Defense Minister during
the Lebanon War, voted against the budget. Labor Party MK
and former Deputy Defense Minister Ephraim Sneh also voted
against, saying that the budget did not provide enough funds
for defense, especially in light of the threat posed by Iran.


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Increase Expenditures - Responsibly
--------------


3. (C) The major consequence of the public pressure to spend
more is a growing consensus across the political and economic
spectrum that the annual expenditure increase ceiling must
rise beyond its present 1.7 percent. MK Braverman's private
member bill to increase the ceiling for the 2008 budget was
not adopted, but the widespread sentiment in support of it
indicates that an increase in 2009 -- if Israel's economy
continues its strong growth -- is all but inevitable. (At
one point, opposition leader Bibi Netanyahu, a noted fiscal
conservative, confessed to the Ambassador that he feared many
in his Likud party were prepared to get on Braverman's
bandwagon.)

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Expenditure Ceiling on JEDG Agenda
--------------

TEL AVIV 00000168 002 OF 004




4. (C) In a January 17 conversation with EconCouns, Michal
Finkelstein, the Senior Adviser to the MOF Director General,
said that the MOF had difficulty restraining the desire for
higher spending in 2008, and that the expenditure ceiling
will definitely have to rise for 2009. She noted that the
call by the new Budget Director, Ram Belinkov, to return to a
one percent ceiling was "unrealistic," and that the likely
number for 2009 will be somewhere between the present 1.7
percent and the 2.5 percent proposed by Braverman. (Note:
Belinkov was formerly the DG of the Interior Ministry under
Bar-On. He had served in the MOF from 1983-1990, rising to
the rank of Deputy Budget Director before leaving for the
private sector. Ha'aretz reported on January 2 that he
called for a return to a one percent expenditure ceiling.
According to the report, he said that moving up to 2.5
percent would harm the credibility of the government and also
leave Israel unprepared to deal with the next economic crisis
that might arise, for example, as a result of an economic
slowdown in the U.S. End Note). Finkelstein added that
Finance Minister Bar-On is "a fighter," and is committed to
ensuring that Israel maintain its policy of fiscal
responsibility. She also referred to Israel's obligations
under the 2003 U.S.-Israel Loan Guarantee Agreement as a
vital tool to restrain spending and said that her ministry
will come to the Joint Economic Development Group (JEDG)
meeting currently scheduled for early April in Israel
prepared to discuss the possibility of raising the
expenditure ceiling in a responsible way.


5. (C) In a public lecture on December 26, 2007, Deputy
Governor of the Bank of Israel Tsvi Eckstein said that Israel
would be able to convince the USG of the need to spend more,
but should do so responsibly and not suddenly announce a
change without prior consultations (Note: as happened with
the increase from one percent to 1.7 percent in 2006, for
which the GOI sought retroactive USG approval. End Note).
Professor Manuel Trajtenberg, Head of the National Economic
Council in the Prime Minister's Office, has publicly stated
that it is necessary to devise a formula to change the
expenditure target each year. Dr. Adi Brender of the Bank of
Israel's Research Division told Deputy EconCouns in a recent
conversation that the one and 1.7 percent ceilings helped the
Israeli economy become more balanced. He said that now,
however, it is important to "think more long-term" regarding
fiscal policy, and that the annual expenditure ceiling need
no longer be fixed years into the future.

--------------
Budget Passed Easily
--------------


6. (U) The 2008 budget, which totals NIS 315.8 billion,
about USD 84 billion at the current exchange rate of NIS 3.75
to the dollar, passed by a large 64 - 32 margin on December
27, 2007. This was the first time the budget was fully
approved before the beginning of the budget year as required
by law. Beyond the 1.7 percent expenditure increase over
2007, the 2008 budget includes several one-time expenditures
agreed to by the USG resulting from the 2005 Disengagement
(NIS 1.1 billion - USD 293 million -- 0.5 percent) and the
2006 Lebanon War (NIS 2.2 billion - USD 586 million -- one
percent). Total expenditures for 2008, aside from debt
servicing and some small sums invested in infrastructure,
will be NIS 235.7 billion (USD 63 billion). The deficit
target in the 2008 budget is 1.6 percent of GDP, compared to
the 2.9 percent target figure in 2007. (Note: The actual
2007 deficit was 0.02 percent. End Note). The budget was
prepared assuming a 4.2 percent growth rate in 2008.

--------------
Debt Declines
--------------


7. (U) Spending is broken down as follows: 31.8 percent for
debt servicing; 28.4 percent for transfer payments and
support/assistance; 17.8 percent for defense; 17.6 percent
for other "civilian needs;" and 4.4 percent for unspecified
investments and credits. Civilian spending will increase
approximately 6.8 percent, which includes the results of the
new public sector wage agreement that was signed with the
Histadrut Labor Federation in July 2007, and various other
government commitments. Interest payments will decline by
approximately 5.3 percent due to the decline in domestic and
foreign debt resulting from the responsible fiscal policies
followed in the last few years, according to the MOF. The
reduced debt is evidenced by the decline in the "debt to GDP

TEL AVIV 00000168 003 OF 004


ratio" from 102 percent in 2003 to an estimated 80 to 82
percent in 2007.

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Defense Increases
--------------


8. (U) The defense budget will increase by NIS 2.9 billion
(USD 773 million) over 2007 to NIS 51.3 billion (USD 13.7
billion). According to the MOF, this increase is the result
of the GOI's adoption of the recommendations of the Brodet
Committee, which studied how to address the problems of the
defense establishment that were exposed by the Second Lebanon
War in 2006. NIS 2.5 billion (USD 666 million) represents
the third and final tranche of an NIS 8.2 billion (USD 2.2
billion) Lebanon War supplement distributed between 2006 and

2008. (Note: The GOI accepted in principle the Brodet
guidelines recommending that the defense budget be increased
substantially over the next 10 years and that the defense
establishment carry out internal efficiency measures. The
Brodet report called for increased spending of a cumulative
NIS 100 billion (USD 26.7 billion) between 2008 and 2017, of
which NIS 46 billion (USD 12.3 billion) would come from
higher budgetary allotments, NIS 30 billion (USD eight
billion) from efficiency measures, and the rest from
increased U.S. military assistance. End Note)

--------------
Turmoil in Education
--------------


9. (U) The budget of the Education Ministry in 2008 totals
NIS 27.6 billion (USD 7.4 billion),with the two largest
components being NIS 9.3 billion (USD 2.5 billion) for
elementary education and NIS 7.2 billion (USD 1.9 billion)
for high school education. The budget also includes NIS 1.16
billion (USD 309 million) to begin implementing education
reforms which will cost approximately NIS five billion (USD
1.33 billion) over six years. The reforms will change the
teachers' wage structure and work week and provide additional
hours for student instruction. The separate budget for
higher education totals NIS 6.33 billion (USD 1.69 billion),
which does not include money to begin implementing the six
year reform plan recommended by the Shochat Education
Committee in 2007.


10. (U) Education spending has received unusual attention
over the past year due to severe labor unrest in the sector.
The largest secondary school teachers union struck junior and
senior high schools for over two months in the fall of 2007,
with the strike ending only after the union agreed to
implement reforms in return for a wage hike. Also,
university lecturers have been on strike for higher wages
since the beginning of the 2007-2008 academic year. So far
the Labor Courts have not intervened. Earlier this week, the
universities said that the failure to reach a resolution in a
few days will result in the complete cancellation of the
first semester and may put the entire academic year into
question. This threat brought about the desired result as
Israel radio news has just begun reporting that the strike
has been settled (Friday January 18, 3 pm Israel time).


--------------
Comment
--------------


11. (C) Prime Minister Olmert is facing numerous near-term
political challenges which strongly increase the temptation
for him to make promises about new spending for 2009 and
beyond to strengthen the coalition and the support for him
personally. The first is the resignation this week of
Minister of Strategic Affairs Avigdor Lieberman and the
removal of the eleven Yisrael Beiteinu Party MKs from the
coalition, reducing it to 67 MKs out of 120. There are also
significant rumblings against the Prime Minister being heard
in his own Kadima Party in anticipation of the January 30
release of the final Winograd Report on the Second Lebanon
War. Finally, the pressure on Labor Party Leader and Defense
Minister Ehud Barak to pull the party out of the coalition
when the report is published is ratcheting up. To counter
these pressures, the PM has already secured Knesset approval
to resurrect the defunct Religious Affairs Ministry, making
it very likely that spending beneficial to the religious
parties will increase at the expense of other ministries in
the short run and at the expense of the budget deficit in the
long run. He is also courting United Torah Judaism by

TEL AVIV 00000168 004 OF 004


raising the possibility that one of its leaders, Ya'acov
Litzman, will return to his former extremely influential post
as chairman of the Knesset Finance Committee. The coalition,
which only several weeks ago displayed unusual strength in
securing the easy and timely passage of the 2008 budget, is
now facing a period of political uncertainty. The
government's long-standing policy of fiscal responsibility
may come under renewed pressure as the Prime Minister
maneuvers to navigate the political minefields. End Comment



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