Smotrich presents draft state budget to Netanyahu, ministry representatives

The Knesset has until May 28 to pass the budget or the government falls.

Israeli Prime Minister Benjamin Netanyahu and Finance Minister Bezalel Smotrich attend a press conference at the Prime Minister's Office in Jerusalem, Jan. 25, 2023. Photo by Yonatan Sindel/Flash90.
Israeli Prime Minister Benjamin Netanyahu and Finance Minister Bezalel Smotrich attend a press conference at the Prime Minister's Office in Jerusalem, Jan. 25, 2023. Photo by Yonatan Sindel/Flash90.

Finance Minister Betzalel Smotrich presented the draft 2023-2024 state budget to Prime Minister Benjamin Netanyahu yesterday. The budget must be approved by the Knesset by May 28 or else the government automatically falls and an early election is held.

Until the new budget is approved, the government ministries will continue to be funded under the framework of the 2022 version.

In his opening remarks at the discussion, Smotrich emphasized the effort that went into the budget and the accompanying Economic Arrangements Bill, saying, “We worked on the budget day and night to bring it in on time.” Bank of Israel Governor Prof. Amir Yaron and representatives from the government ministries were also present.

Earlier, the Finance Ministry said it was aiming for a cabinet vote on the budget draft in mid-February, an initial parliamentary vote by the end of March, and final approval in late May.

Smotrich pledged fiscal responsibility and a frugal economic policy. Israel posted its first budget surplus in 35 years in 2022, at 0.6% of the gross domestic product. However, the forecasts for this fiscal year are more pessimistic. S&P Global Ratings projects a deficit of 2% of GDP for 2023.

Moshe Yanovskiy, a leading research fellow at the Shomron Center for Economic Policy, told JNS that “this proposal must be seen through the view of the global economy. We are in a very tough spot right now globally. We are coming off a high of 2022 but 2023 is a different story. In that context restrained spending policy is essential.”

The budget and the Economic Arrangements Bill

The proposed state budget for 2023 amounts to 484 billion shekels (about $138 billion), up from 452.5 billion shekels (some $129 billion) in 2022.

The draft budget is based on conservative working assumptions regarding tax revenues. According to Smotrich, this is due to a decrease in tax collection from the high-tech industry and a decrease in real estate taxation.

The minister emphasized that the budget includes “significant structural reforms that will accelerate growth in the economy, with budgetary investment in the right and efficient places accompanied by proportionately restraining spending.”

The proposed budget includes several new infrastructure and housing projects. It devotes significant funds for the building of a metro system in the Dan Region (Greater Tel Aviv), to be funded by a newly levied tax on property owners in the “affected areas.”

Additionally, significant resources are dedicated to a plan intended to increase the supply of housing through financial incentives and subsidies to local governments to authorize and expand construction.

Yanovskiy said this was the “crux” of the proposal. The housing crisis is the foremost economic problem in Israel and the proposed plan had to balance between frugal spending and a dire need for investment in this market, he explained.

MK David Bitan (Likud), chairman of the Knesset Economic Affairs Committee, said yesterday that “if the economic proposal does not include an answer to the housing crisis, we will not vote in favor of the budget even if there are elections [as a consequence].”

Despite promises made by the government coalition, several key commitments, totaling around 20 billion shekels ($5.7 billion), will not be funded according to the proposed budget.

Free education will not be provided for children aged 0-3, and there will be no 20% increase in soldiers’ wages. Additionally, National Security Minister Itamir Ben-Gvir’s demands for an increase in the police budget will not be met. Other expenses, such as increased pensions for career soldiers, are also not funded.

However, according to a statement by the Finance Ministry, some of these proposals may be brought to the Knesset after the budget is passed. Finally, proposed funding for increased secular studies in the ultra-Orthodox school systems was also cut.

“The proposed plan is built on the principle of fiscal responsibility. There are many provisions which we would have liked to add in the proposal but you always need to compromise,” a representative of the Finance Ministry told JNS.

Smotrich also presented an official draft of his Economic Arrangements Bill. An Economic Arrangements Bill was first enacted in 1985 and is a broad economic platform that is passed together with the budget. This year’s draft Economic Arrangements Bill includes more than 40 provisions, with a stated goal of “promoting economic growth and streamlining government processes.”

The bill includes several measures to promote competition and reduce concentration in various spheres such as in the food and agriculture, banking, insurance and automobile markets.

The bill also includes a proposed National Infrastructures Law to speed up the implementation of projects and cut their construction time in half.

The Economic Arrangements Bill also incorporates steps to reduce bureaucracy and regulation for the private sector. This includes removing excess regulations on food importers, reducing bureaucracy for small businesses, reducing small business taxes, and easing licensing mechanisms for factories.

The bill also seeks to streamline the public sector with steps such as reducing the burden on the health system by streamlining the process of issuing sick day confirmations and receiving prescriptions for drugs.

Smotrich also announced significant steps to increase the personnel and budget of the Ministry of Defense.

The Economic Arrangements Bill also promotes steps for digitization in the government.

Finally, it includes measures to combat economic crime, including a “war on black capital.” According to Smotrich, this will reduce the ability to launder cash, which is a main factor in funding criminal organizations, and fight fraud in the fuel sector.

Smotrich’s warning

The finance minister closed his remarks by expressing his belief that “the macroeconomic situation in Israel is good.” He further explained that “the labor market is overall stable, and inflation has risen at lower rates compared to the rest of the world.”

However, he warned that Israel faces significant risks in the short term due to the spread of inflation in the world and the interest rate increases that followed it. To avoid a possible economic crisis, Smotrich stressed the importance of acting responsibly and ensuring the Israeli economy can weather the period and emerge stronger.

The central bank projects 3% inflation in 2023 and economic growth of 2.8% this year after a 6% pace in 2022.

Smotrich stressed the importance of restraining spending. “In order to avoid inflation, we must ensure that fiscal policy does not conflict with monetary policy. Restraint on spending conveys to the public, the rating companies and investors that the budget is professional and responsible,” he said.

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