Israel Approves Two-Year Budget, Giving Netanyahu a Tailwind

  • Economic reforms aim to bring down Israelis’ cost of living
  • Apartment tax, telecom competition among key measures

Israel’s parliament approved the government’s two-year budget proposal, seen by Prime Minister Benjamin Netanyahu as key to his government’s stability.

After a marathon session beginning Wednesday afternoon, the budget passed early Thursday by a 60-48 vote. The government set spending at 359.7 billion shekels ($94.2 billion) in 2017 and 376.7 billion shekels in 2018, allowing the ceiling on Israel’s deficit-to-GDP ratio to rise to 2.9 percent, from the 2.5 percent previously planned for next year.

The approval gives Netanyahu’s coalition breathing space and a stable outlook in a country where governments often don’t reach the end of their four-year terms. Finance Minister Moshe Kahlon, who fought to impose a tax on owners of three or more apartments as part of his campaign to lower housing prices, praised the budget for addressing social ills.

“The budget we’re authorizing today is social and color blind,” Kahlon said Wednesday. “It helps all populations.”

Beating Estimates

Israel’s economy has surpassed analyst expectations to grow more than 3 percent in annualized terms in the past two quarters. Revenue from consumption duties -- car purchases in particular have soared this year -- has allowed Kahlon to both reduce taxes and boost spending in the budget, with the steepest cuts going to large companies that conduct research and development in Israel and register intellectual property here.

However, such steps could lead to an increase in the government’s debt-to-GDP ratio --currently just under 65 percent -- and expose the economy to risks if optimistic growth scenarios don’t materialize, the Bank of Israel has said. Credit-rating agencies including Moody’s Investors Service also warned against raising the deficit earlier this year. Still, with Israel running a current-account surplus, Fitch Ratings in November raised the country’s sovereign rating to A+ from A.

The budget includes a boost in infrastructure spending, with the Transportation Ministry receiving an increase of more than 20 percent to 19 billion shekels in 2017 and 19.5 billion shekels in 2018. Education and defense spending, the two largest portions of the budget, also rose, with defense spending slated to top 70 billion shekels in each year of the budget.

Telecom Reform

The document also includes reforms intended to bring down the cost of living, including one to boost competition in the fixed-line telecommunications market by allowing companies to hook up to Bezeq Israeli Telecommunication Corp. Ltd.’s infrastructure.

“The telecommunications reform passed in this budget will allow other companies to take market share from Bezeq, which is basically a monopoly in the fixed-line area, and help bring prices down through competition,” Eitan Cabel, chair of the Economic Affairs Committee, said in an interview earlier this month.

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