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Opinion / New Israeli Budget Demonstrates Knesset-Wide Agreement on Conservative Economics

Discourse around the budget shows overall consensus that the war requires immediate cuts to public spending | Most criticism focuses on quibbles over exactly which cuts to make and how deep, with no one left to advocate for a left-wing economic approach

ישיבת ממשלה (צילום: קובי גדעון/לע"מ)
Government meeting (Photo: Kobi Gideon, Government Press Office)
By Erez Raviv

The new national budget was approved on January 15th, and despite the usual media frenzy, it is nearly impossible to identify any real ideological opposition to it from anywhere on the Israeli political spectrum. If you look very closely you may find some variation in approaches, but they are all firmly planted within the economic right-wing.

Israel’s war with Hamas is forcing a significant increase in the budget deficit, due to a decrease in revenues and an increase in expenses. Most politicians and senior economic officials share the fiscally conservative desire to reduce the deficit as quickly as possible, a clear expression of right-wing economic priorities. They see themselves as accountants needing to balance the books – if revenue decreases, expenses should be lowered as much as possible. Any political differences lie in the nuances regarding how it should be done.

Budget Cuts and Tax Raises

The Bank of Israel proposed deepening the budget cuts, except in areas which are central to growth, and raising taxes immediately. The Finance Ministry’s proposal was to simultaneously continue significant military spending and cut at least six billion shekels ($1.62 billion) from almost all ministries, including those central to national economic growth. The Treasury is also proposing to raise various taxes this year, but unlike the Bank of Israel, they want to postpone the bulk of the increases to 2025 and 2026. The total of these adjustments is about 20 billion shekels ($5.4 billion) in the current budget.

It is difficult to know to what extent this proposal reflects the positions of Finance Minister Bezalel Smotrich from the extreme right Religious Zionist party, whose statements have been volatile. In 2023 he spoke of "painful cuts," in 2024 he talked about a "unifying budget," and upon submitting the budget to the government, he explained that a "unifying budget" is actually one where cuts are made for everyone.

On the one hand, Smotrich declares hawkish, principled right-wing positions against public spending and in favor of privatization. On the other hand, his party’s core constituency is highly focused on securing government funding to promote Jewish settlement in Judea and Samaria (the West Bank). Furthermore, Smotrich’s party is a junior partner in a right-wing coalition that is dependent on the two ultra-orthodox parties, Shas and United Torah Judaism, which demand significant budgetary allocations for their constituencies. Smotrich is forced to walk an ideological tightrope, balancing the extreme right-wing economics of leading finance ministry officials with the partisan need to make allowances for sectoral budgets.

Critics Demand More Cuts, Not Fewer

The National Unity party, led by Minister Benny Gantz, voted against the budget. The party stated:

"We demand a significant reduction of the government ministries and the salary of Members of Knesset (MKs), a moratorium on the Norwegian Law [which allows ministers or deputy ministers to resign from the Knesset but remain a minister], and a significant cut in the coalition funds. The budget presented by the coalition does not invest enough in engines of growth, and even worse – it does not reflect the necessary fundamental change of priorities and ignores the heavy consequences of the war."

Minister Gideon Sa'ar, the decidedly right-wing leader of the New Hope party (which united with Gantz’s Blue and White party to form National Unity),  announced that he intends to oppose the budget, because in his opinion the cuts are too low and the deficit too high.

Sa'ar's positions are not fundamentally different from those of finance committee member MK Vladimir Beliak (from the centrist Yesh Atid party), who detailed a right-wing economic proposal despite calling the budget "an irresponsible and even dangerous budget for the future of Israel's economy." Beliak noted that in 2024, interest payments on the national debt alone will increase by almost 4 billion shekels ($1.09 billion) compared to the original plan. Significantly, Beliak proposed a deficit of 4.5%, which is only about 85 billion shekels ($23.06 billion), instead of the 6.5-7% deficit currently planned, a gap of tens of billions of shekels.

He further proposed to "cut at least 70% of the coalition funds for 2024" (about 5.5 billion shekels, or $1.49 billion), "close 10 unnecessary offices" (about 2 billion shekels, or $0.54 billion), and "reimpose the tax on sugary drinks and disposable utensils" (about 1 billion shekels, or $0.27 billion). Additionally, Beliak suggests releasing  trapped profits by reducing the dividend tax, and "encouraging engines of growth." According to him, these measures will not only reduce the deficit, but will make it possible to avoid cuts.

The problem with Beliak's proposal is that the numbers just don't add up.

"Engines of growth" do not usually generate actual growth in the same budget year, but only in the following years, sometimes after a decade. The total of his proposals reaches 1% of GDP at most, which leaves a gap of about 25 billion shekels ($6.78 billion) even after the proposals are implemented and without canceling any cuts in essential services.

In practice, the economic outlook presented in Beliak’s proposal contradicts his own criticism of the government’s devastating budget cuts. Similarly, Yair Lapid, the leader of Beliak’s party, recently spoke out against the strangulation of the public sector as a mistake that must be reversed, but he did not take a clear position on the budget issue.

Shas – The Only Voice on the Economic Left

The only minister who expressed a position that reflects the view of the economic left is Interior Minister Moshe Arbel of the ultra-orthodox Shas party. According to him:

"We can just this once decide that this time we will not harm the citizens, but will rather expand the government debt, which will still be among the lowest in the Western world, and invest in engines of growth which will later contribute to reducing the debt in the future."

Arbel was the only voice in the political desert which expressed opposition to extreme right-wing policies. But in the end, he and his party voted in favor of the budget.

According to the principles of the economic left, budget cuts today endanger the chances of economic recovery tomorrow, and it is better for the government to act counter-cyclically. That is, when the economy falters and the private sector is in a recession, the government temporarily steps into its shoes: it increases investments and avoids cuts, especially in areas with economic growth potential. Moreover, the government should not plan to repay the debt at all, but rather refinance it in the coming years with the help of a larger and more robust economy. This policy should continue until the socioeconomic gaps resulting from public underinvestment are bridged, and then action should be taken to curb public spending. However, part of this approach includes an emphasis on universal allocation principles rather than sectoral mechanisms – a position that the Shas party would be unlikely to ever adopt.

A comparative analysis shows that non-military public spending in Israel, a figure that includes the entire public sector and not just the state budget, is many percentage points lower than the average in developed countries. Those percentage points amount to 171 billion shekels ($46.39 billion) each year, which easily amounts to an underinvestment of about a trillion shekels ($270 billion) in the last decade.

The left-wing economic approach also relies on parts of the economy that are not at all visible in the budget numbers, such as the extent of public underinvestment, which creates hidden economic damage. For example, road congestion causes damage of over 40 billion shekels ($10.85 billion) per year, air pollution and poor health infrastructure cause damages of billions of shekels per year, and failure to invest in the development of the healthcare system will result in greater damages in the future if hospital infrastructure (including numbers of doctors and beds) does not catch up with the gap from population growth. And still, criticism of underinvestment currently has no political home in any party in the Knesset.

This article was translated from Hebrew by Hannah Blount.

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