Dei'ah veDibur - Information & Insight

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13 Ellul 5763 - September 10, 2003 | Mordecai Plaut, director Published Weekly









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Treasury Calls for NIS 10B Cut
by Yated Ne'eman Staff

Finance Minister Benjamin Netanyahu's budget for the next fiscal year includes a NIS 10 billion cut in spending that features a NIS 3 billion cut in the defense budget. The Shin Bet and Mossad are seen being forced to cut at least 13 percent of their officers in the coming three years.

For the first time in the country's fiscal history, the Treasury has recommended the adoption of economic policies for the next four years.

The finance minister warned that if his demands for defense cuts are not accepted, "very painful" budget cuts will have be implemented in other ministries.

Netanyahu also proposed cutting tax breaks for early retirees and streamlining the public sector. He said his proposal would lead to economic growth of 0.5-1 percent by the end of 2004. The 187-page budget book includes a NIS 20.6 billion budget deficit, equal to 4 percent of gross domestic product, a full one percentage point above what he promised the Bush administration when negotiating for loan guarantees. An across-the-board 15 percent budget cut will affect every ministry, and next year's government expenditures are supposed to be no more than NIS 217 billion.

The finance minister claimed the plan would improve the quality of life in Israel, strengthen the weaker sectors of society, and create a tax environment that is very attractive to foreign investors.

"Our primary goal is to improve the quality of life for all residents of the State of Israel. This we will accomplish via the promotion of economic growth and the strengthening of weak population sectors, and with consumer defense via the breakup of monopolies," Netanyahu said, referring to Mekorot and Tnuva. "Israelis do not know that the milk they buy is the most expensive in the world. We plan to change this," he said.

The finance minister also said the treasury intends to reduce grants to poverty-stricken cities and instead impose tax breaks, which he said would draw investment and advance industry.

The proposed economic plan includes privatization of Bank Leumi, Israel Discount Bank, Bezeq and Oil Refineries. The state-owned ports will also be opened to competition, Netanyahu said. He added that he intended to secure dramatic investment in the national train system.

The plan includes reforms in both the treasury and education system, and includes raising the age of retirement and a full tax on individuals choosing to take early retirement.

"There is growing public understanding, and understanding in the defense establishment, that such a cut is possible. The regime of Saddam Hussein has been dismantled by the US, and thus the threat of an invasion from the east has been eradicated, allowing us to make these cuts," Netanyahu said.

"However I will be the first minister, before Defense Minister Shaul Mofaz and Prime Minister Ariel Sharon, to provide the army with resources when they are needed," he noted.

The planned 11 percent to 15 percent cut in the spending of each ministry will depend in each case on the behavior of the ministry in question. Those offering their own proposals will see an 11 percent reduction, while those requiring the Treasury to impose "efficiency" plans will be forced to swallow a 15 percent cut.

Some 1,500 civil servants will be laid off. Not only will Interior Ministry districts be consolidated, but organizations such as the Public Works Department are to be dissolved. The Postal Authority will be transformed into a state-owned company, and competition in the mail delivery market will begin. The program also calls for cuts in housing grants totaling NIS 200m., and a NIS 250m. cut in the health basket.

VAT is expected to remain at 18 percent, and water prices will increase by 0.15 agorot for both industrial and home use.

NIS 1.5b. will be taken from government insurance companies, in the form of a withdrawal of surplus funds from the Avner and Karnit motor vehicle accident victims insurance associations.

The Treasury further announced a planned increase in taxes on the income of foreign workers, paid by their employers. Already at 8 percent, the tax will rise to 20 percent as of January 1, and gradually to 40 percent.

Minister-without-Portfolio in the Treasury Meir Sheetrit announced the adoption of the Wisconsin plan for eliminating welfare. Aimed at being operational next year, the program forces unemployment compensation recipients to arrive in the morning of each working day at Employment Service offices and search for work while receiving professional retraining.

Fitch Ratings has reportedly given a verbal okay to the 2004 budget, and will not downgrade Israel's credit rating. The agreement with the US providing Israel with loan guarantees requires Israel not to exceed a 3 percent GDP deficit. However Washington has apparently already approved the move, and no sanctions are therefore expected.

"We are not making any deal with the Bank of Israel," Minister Meir Sheetrit said. "We hope that the Bank of Israel will continue to gradually drop nominal interest."

Netanyahu will be submitting the budget bill to the Knesset for the first reading at the end of next month. The Finance Committee and the other relevant committees will be required to prepare the various items for the second and third readings at the end of December.


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