Israel Budget Tests Wills as Kahlon Questions Promised Funds

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Wrangling over spending is roiling Israeli Prime Minister Benjamin Netanyahu’s governing coalition.

A first debate in cabinet on the 2015-2016 budget was postponed Sunday because political parties weren’t willing to forfeit spending won in coalition agreements just two months ago. With Netanyahu holding a one-seat margin in parliament, the stakes are high: Failure to pass a budget by Nov. 19 would result in parliament’s dissolution.

Finance Minister Moshe Kahlon wants to set the 2016 budget deficit ceiling at 2.9 percent of gross domestic product, a finance ministry official said, speaking anonymously because of the sensitivity of the matter. To meet that target, he’s trying to persuade coalition partners to accept less money, the official said. Coalition factions have refused.

“This is a signed agreement, and we don’t want to change it,” Moshe Gafni, a member of the ultra-Orthodox United Torah Judaism party and head of parliament’s finance committee, said in an Israel Radio interview. “Budget officials say the situation requires cuts, and we say it doesn’t.”

While haggling over the budget is an annual ritual, the government’s razor-thin majority could turn the debate into a matter of who blinks first.

Compromise Probable

“Nothing causes a major threat to a government like arguments about the budget,” said Abraham Diskin, professor emeritus of political science at the Hebrew University of Jerusalem.

Still, although governments have fallen in the past over spending debates, “chances that they will come to a compromise are quite high,” Diskin added. “No one is after new elections.”

Last month, the International Monetary Fund urged Israel to immediately act to bring down the “stubbornly high” fiscal deficit. The Bank of Israel has called on the government to cap the deficit ceiling at 2.5 percent of GDP.

Planned spending would have to be cut by about 12 billion shekels to keep the deficit at 2.9 percent of GDP, the finance ministry official said. Failure to make the cuts would push the deficit above 4 percent, the official said.

Markets that have been through budget bickering before shrugged off the latest snags. The TA-25 benchmark stock index rose 1 percent to 1,677.29 at 10:53 a.m., the highest since June 25.

The yield on Israel’s benchmark government bond due March 2024 rose 4 basis points to 2.28 percent, after advancing 7 basis points on Sunday, but on the Greece bailout, not the spending plan, said Modi Shafrir, chief strategist at Mizrahi Tefahot Bank Ltd.’s finance division.

The budget issue probably will be resolved and “doesn’t interest the market at this time,” Shafrir said. “It will only interest the market if they suddenly decide to expand the budget deficit” to the point that rating companies would lower Israel’s profile, he said.