Israel Budget Kingpin Opposes Flug, Lapid Deficit Plans

The head of the Israeli parliament’s finance committee said both Bank of Israel Governor Karnit Flug and Finance Minister Yair Lapid have the wrong answer on how to tackle next year’s outsize budget gap.

Nissan Slomiansky, whose cooperation is key in pushing next year’s budget proposal through parliament, says he opposes raising the deficit limit, said to be Lapid’s preferred solution, and increasing taxes, part of Flug’s suggested fix, to meet next year’s gap target. Slomiansky doesn’t rule out spending cuts.

“You don’t need a finance minister if his solution is to increase the deficit,” Slomiansky, an ordained rabbi with a degree in physics, said in an interview in his Knesset office in Jerusalem. “The trick is to find additional resources some other way.”

The government’s budget proposal, whose first draft is generally submitted to cabinet over the summer, must be approved by the Knesset before becoming law. Most of the detailed discussion takes place in the Knesset Finance Committee, whose daily agenda is controlled by Slomiansky, who has the power to schedule debates -- or not.

The Bank of Israel said last month that the government must increase tax revenue and cut spending by a total of 18 billion shekels ($5.2 billion) next year to meet the planned deficit of 2.5 percent of gross domestic product. Lapid opposes raising taxes, and Channel 2 reported he supports covering the budget shortfall by raising the deficit limit. The ministry declined to comment on the report.

‘Chain Reaction’

The Finance Ministry thinks the gap is much lower than 18 billion shekels, Slomiansky said. He didn’t give specifics and the ministry hasn’t released a figure.

“I won’t agree to increase the burden” on taxpayers, said Slomiansky, who was first elected to the Knesset in 1997. “On the other hand, we mustn’t raise the deficit. Every increase in the deficit sets off a chain reaction and causes us to pay higher interest rates. This costs us a lot of money.”

The most likely scenario will be a small increase in the deficit, combined with some spending cuts, according to Yaniv Pagot, chief strategist at Ramat Gan, Israel-based Ayalon Group Ltd. The government may also be able to bring some spending forward into 2014, since the deficit at present looks like it will be below the 3 percent limit set by law, he said.

“From a political point of view, I don’t see a tax increase as a possibility,” Pagot said. “I don’t think that raising the deficit by a quarter-point will create a big drama in the markets. There is no doubt that it does have a price in terms of the country’s image. But what’s important is that the deficit will still be declining.”

Over the past decade, Israel has reduced its debt-to-GDP ratio from about 95 percent in 2003 to about 67 percent last year. If Israel meets the declining deficit limits it has set for itself, debt-to-GDP will probably fall to about 60 percent by the end of the the decade, according to the Bank of Israel.

To contact the reporter on this story: Alisa Odenheimer in Jerusalem at aodenheimer@bloomberg.net

To contact the editors responsible for this story: Alaa Shahine at asalha@bloomberg.net Mark Williams, Amy Teibel

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