(Updates with Netanyahu quote in third paragraph, shekel and bonds in 10th.)
By Calev Ben-David
March 14 (Bloomberg) -- Israeli Prime Minister Benjamin Netanyahu reached agreement on a governing coalition that’s united on key domestic issues and deeply divided on making peace with the Palestinians.
In his first public comments today after the deals were clinched, Netanyahu said the budget would be his new government’s top priority.
“The first thing our government will have to handle is to pass a budget, a budget that will protect the Israeli economy,” he told a meeting in Jerusalem of his Likud party and the Yisrael Beitenu faction, which ran jointly in January elections, in remarks broadcast on Israel Radio.
The coalition’s make-up will enable the incoming government to make the budget cuts necessary to keep spending in check, after last year’s deficit came in above target. Ultra-Orthodox parties that had supported the previous government in exchange for hundreds of millions of shekels in subsidies for their community have been elbowed out.
Netanyahu’s coalition partners will also support his previously failed efforts to limit the number of military draft exemptions given to ultra-Orthodox men so they can pursue religious study. That measure, which had been opposed by ultra-Orthodox lawmakers, is designed as a first step toward encouraging devout men to join the work force. More than half of them shun work to devote their lives to religious study, government figures show.
Designated Finance Minister Yair Lapid, whose Yesh Atid party will be the second-biggest faction in the new government, wrote on his Facebook page that party leaders probably would sign the coalition agreements this evening.
Netanyahu called for early elections last year after his coalition partners refused to approve 14 billion shekels ($3.8 billion) in budget cuts to meet a deficit target of 3 percent of economic output.
“In terms of advancing on domestic issues, this is probably as good a coalition as Netanyahu could have asked for,” said Avraham Diskin, professor of political science at Hebrew University of Jerusalem. “On the peace process, the government has parties and politicians ranging from hard-line hawks to real doves, and is going to come into conflict when it comes to removing even the smallest West Bank settler outpost.”
The new government may hold 68 of parliament’s 120 seats. Netanyahu’s third term in office, and second consecutive term, gets under way just before U.S. leader Barack Obama begins his first presidential visit to Israel on March 20.
Israel’s benchmark TA-25 index reacted positively to news of the government’s formation, rising 0.3 percent today at 1:33 p.m. in Tel Aviv trading. The TA-25 rose 1.4 percent this week as the composition of the new coalition became clear.
The shekel weakened 0.3 against the dollar today and the yield on Israel’s benchmark government bonds rose two basis points, or 0.02 percentage point, to 4.05 percent.
“The signal this government is giving is one of continuity and stability, that Israel’s economic strategy of bringing the budget deficit back under control will go on,” said Leo Leiderman, chief economist at Tel Aviv-based Bank Hapoalim Ltd.
The new government yokes together lawmakers who want to reach a peace accord and others who oppose an independent Palestinian state.
The coalition will be led by Netanyahu’s Likud party, which ran in Jan. 22 elections on a joint ticket with the Yisrael Beitenu, winning 31 seats in the Knesset.
Yesh Atid, Hebrew for “There is a Future,” which campaigned as a champion of middle-class concerns. won 19 seats. Yesh Atid leader Lapid, a former television interviewer with no political experience, will serve as Finance Minister, Netanyahu said today.
The third-biggest party in government will be the 12-seat Jewish Home party, whose leader Naftali Bennett, a former technology entrepreneur, will take over the Ministry of Industry, Trade and Labor. Jewish Home supports building more West Bank settlements and opposes a Palestinian state, putting it at odds with the other coalition parties, which support a two-state solution to the Israeli-Palestinian conflict.
Foremost among the coalition members that want to advance the peace process is the six-seat Hatenuah party, a new faction headed by former Foreign Minister Tzipi Livni, who will head the Justice Ministry.
Netanyahu is holding the foreign minister’s job for Avigdor Liberman, leader of the Yisrael Beitenu party, who resigned in December after being indicted on charges of fraud and breach of trust. Liberman will continue to serve in the Knesset through his trial, which is set to resume in April.
The parliamentary opposition will be headed by the 15-seat Labor party, whose leader, Shelly Yachimovich, refused Netanyahu’s offer to join the government, saying the prime minister is not sufficiently committed to the peace process and supports economic policies that hurt Israel’s weakest.
Joining the opposition for the first time in a decade are two parties representing Israel’s ultra-Orthodox Jewish sector, Shas and United Torah Judaism, which oppose Yesh Atid and Jewish Home’s demand to end most draft exemptions.
The new government will also need to contend with Iran’s nuclear program, which Netanyahu has described as an existential threat. The Israeli leader told the United Nations last year that by spring or summer of 2013 the Iranians will have reached the final stage of attaining a nuclear weapons capability. He has said “all options are on the table” to prevent that from happening, including a military strike.
Iran, along with the Israeli-Palestinian peace process and the civil war in neighboring Syria, will be the main topics of discussion during Obama’s Israel visit next week, according to Netanyahu.
“It’s unlikely the Israeli governmental changes will have any real influence on Iran policy,” said Mark Heller, research fellow at the Institute for National Security Studies at Tel Aviv University. “The important decisions are still going to rest with Netanyahu and Obama.”