What will forming the new government cost?

Two days after the election, the identity of the next minister of finance is not yet known. It is already clear, however, that if our elected representatives fulfil even half of their campaign promises, the new government will cost tens of billions of shekels.

From the coalition demands of the haredi parties through the promise of Likud chairperson Benjamin Netanyahu to provide free education from birth to declarations that the Israel Police will double its force, the Ministry of Finance will have to deal with a welter of new demands.

So far, the ministry has fairly easily repulsed the demands that it should open up the huge fiscal surpluses that have accrued this year, amounting to NIS 33 billion. The answer to all the demands is the same: the law does not allow surpluses to be used without legislation to change the spending limit, and that can only be done in the context of the preparation of an orderly budget. The official budget discussions were, however, frozen months ago, as soon as the election was announced.

Now, the budget demands of the various government ministries will be raised again with the Ministry of Finance, and will be swollen by the demands of the new ministers who will be appointed. All these demands will come at the expense of other goals, such as repaying government debt or advancing expensive, long-term infrastructure projects.

The haredi parties: Abolition of Liberman’s taxes

It looks as though Shas and United Torah Judaism will once more be leading partners in setting the government’s economic agenda. The haredi parties based their election campaigns on opposition to Minister of Finance Avigdor Liberman.

The purchase tax that Liberman imposed on sweetened beverages and on disposable utensils was branded by the haredi public as a decree aimed directly at it. Winding it back, as the haredi politicians have promised, will cost the state about NIS 1 billion from loss of revenue from the “Cola tax” alone.

As in previous elections, Shas did not publish a detailed economic platform, but the party has raised several threshold demands as conditions for joining the new government. Shas chairperson Aryeh Deri announced that he would set up a national authority for combatting poverty, and committed to distributing food vouchers to thousands of needy families. The amount that Shas is demanding for these vouchers is NIS 1 billion annually.

United Torah Judaism’s campaign called for, among other things, extension of the Free Education Law to infants from birth to three years. It can only be assumed that this demand was coordinated with the identical election promise of Netanyahu.

The estimated cost of expanding the government subsidy to infant daycare providers, or nationalizing them, is a NIS 15-20 billion addition to the budget base.

Netanyahu: Cutting water, electricity and fuel prices

Netanyahu’s election platform also contains tax cuts. The Likud candidate promised that if he was elected he would reduce income tax and companies tax, and raise employment grants. Together with proposals that arose such as cutting VAT, and an apparent willingness to abolish the tax on sweetened beverages and disposable utensils, the exposure of the state budget to loss of tax revenues reaches NIS 10 billion annually.

Netanyahu also declared that he would cut prices of electricity, water and fuel, and freeze the rise in local taxes (arnona) for a year. Freezing arnona is liable to create a hole in local authority revenues that central government will have to plug.

Reducing the price of electricity will be even more complicated. Only recently, Israel Electric Corporation had to raise debt to cover the underpricing of electricity by the state. Electricity has become more expensive this year, but by less than it should have done according to the price-setting formula.

The jump in the price of coal sent the cost of generating electricity sharply higher, and artificially cutting electricity prices will widen the deficit gap between price and cost. The price of fuel is in a similar situation. In recent months, Liberman has kept the price down temporarily by cutting excise duty, at a cost to the state of over NIS 1 billion. Maintaining lower prices will be another factor making it hard to conduct an orderly fiscal policy.

Ben-Gvir: More police

One of the big winners of the election is Otzma Yehudit leader Itamar Ben-Gvir. After years of failing to pass the minimum vote threshold, he linked up with Bezalel Smotrich’s Religious Zionism party and together they won a 14 of Knesset seats (with 99% of the votes counted). Ben-Gvir has already announced that he will demand the Internal Security portfolio in the new government.

Ben-Gvir talks of strengthening the police, and he is banging on an open door of repeated warnings by Israel Police of a manpower shortage. The estimated cost of a substantial rise in the number of police officers is NIS 3-5 billion.

Even before the election, the Ministry of Defense had budget demands, and these will now be part of the forthcoming budget discussions. They amount to NIS 7-12 billion.

2023 will start with a continuation budget. It will be possible to prepare a new budget by the and of the first quarter.

Besides the expected demands surveyed here, it is probable that dozens more will be raised on the way to forming a new government. In the past few months, government ministries have prepared internal documents with budget targets for next year. These demands will shortly be presented to the newly appointed ministers, and will eventually go to the Ministry of Finance, which will be asked to foot the bill.

On the basis of the parties’ declarations, the total known demands are estimated at NIS 54-78 billion.

Histadrut hungry

The Histadrut (General Federation of Labor in Israel) has also waited a long time for the political system to stabilize to shift up a gear in its talks with the Ministry of Finance on wage agreements for public sector workers. After the long wage freeze during the Covid-19 pandemic and against the background of his campaign on the cost of living, Histadrut chairperson Arnon Bar-David comes to the negotiating table hungry.

Wage agreements signed and budgeted in 2023 could amount to tens of billions of shekels according to the Ministry of Finance’s estimate of known claims. The budget will also include money for the teachers’ agreement, which was signed without a budget source in 2022, and entailed an across-the-board cut in the budgets of government ministries.

Minimum wage again an issue

Another topic of discussion between the Histadrut and the Ministry of Finance is the minimum wage. It currently stands at NIS 5,300 monthly, and was due to start rising gradually six months ago, according to a package deal negotiated between the sides and the employers’ organizations. Since then, however, the deal has been stuck, with members of Knesset, manly from Labor, Blue & White, and Meretz, demanding a larger increase.

Bar-David joined the calls, and withdrew his agreement to a rise in the minimum wage to NIS 6,000 by 2026. He argued that the agreement was made before inflation struck the economy and before anyone could see that huge fiscal surpluses would accumulate.

Published by Globes, Israel business news – en.globes.co.il – on November 3, 2022.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2022.