(Globes).Prime Minister Benjamin Netanyahu last night promised Ministry of Finance officials that the aggregate two-year budget deficit in 2009-10 will be kept at 11.5% of GDP. However, under the agreement reached by Prime Minister Benjamin Netanyahu and his advisor Ori Yogev with Histadrut chairman Ofer Eini, Manufacturers Association president Shraga Brosh, and Labor Party chairman and Minister of Defense Ehud Barak, the aggregate two-year budget deficit will reach 14% of GDP, or about NIS 17 billion more than originally planned.
The budget format approved by Netanyahu sets the 2009 budget deficit at 6% of GDP and the 2010 budget deficit at 5.5% of GDP; in other words 11.5% of the aggregate GDP. He nevertheless agreed to keep some flexibility to manipulate the two. His consent means that the increase in government spending will rise from 1.7% to 3%, amounting to NIS 8 billion in additional spending in 2009-10.
Under pressure from Eini, Brosh, and Barak, Netanyahu informed the Ministry of Finance that he agreed to finance the extra spending by raising VAT to 16.5% from the current 15.5%.
Netanyahu also agreed to allow the Ministry of Finance to propose an across-the-board cut in ministries' budgets, except for the Ministry of Defense.
"Every breach in the budget beyond the 1.7% spending cap will be financed by taxes or cuts. There will be no breach in the deficit. That's important," Accountant General Shuki Oren told “IDF Radio" (Galei Zahal) today.
The Ministry of Finance is now talking about an across-the-board cut of 7%, which will amount to NIS 1.75 billion; each 1% cut from the ministries' budgets, excluding the Ministry of Defense, amounts to NIS 250 million. The budget hike makes it possible to halve the Ministry of Finance's proposed spending cut from NIS 14 billion to NIS 7 billion.
Netanyahu and the others have agreed to make the following cuts: the Histadrut (General Federation of Labor in Israel) will forego NIS 1.25 billion by partly cancelling recreation allowances for public sector employees, out the NIS 4 billion that this item would have cost; and defense spending will be cut by NIS 750 million instead of NIS 3 billion. Only a tenth of the Ministry of Finance's proposed NIS 7 billion in spending cuts, which had aroused such public controversy, remains, amounting to NIS 800 million.
When the additional spending and agreed upon budget cuts are added up, there still remains a NIS 1-1.5 billion budget hole to meet the spending target. However, this is only the start of the Israeli economy's fiscal problems. The extra NIS 8 billion in spending will enable the government to meet its spending target, but it balloons the deficit target.
