The cynics doubted, the opposition told that the budget would not pass, the newspaper headlines said that nothing was closed - but it happened, and the State of Israel has a two-year budget. Despite the difficulties and challenges, the people of finance and Minister Bezalel Smotrich managed to pass a responsible budget in the government yesterday (Friday), which does not break frameworks.
Despite the high coalition demands, the budget was closed on a very low deficit target compared to the previous years.
In order to finance some of the additions demanded by the ministers, a horizontal cut of 3% was made across all ministries, which will force the ministries to cut contracts and purchases, but this is not unusual, previous finance ministers also made horizontal cuts when the budget was approved.
Cut in contracts and purchases.
The budget book, photo: Oren Ben Hakon
in the shadow of political uncertainty.
The demonstrations against the legal reform in front of the Knesset, photo: AP
They don't go back to the "boxes" either, and they also start funding programs
Despite suggestions made to return to extra-budgetary "boxes", which could have worried the credit rating companies, the Minister of Finance and the Prime Minister managed to avoid this.
The horizontal cut financed, among other things, an increase of NIS 9 billion to the Ministry of National Security and an increase of billions to the Ministry of Health and the Ministry of Education to finance the first phase of a free preschool education program - for ages 2-3.
The cabinet meeting voting on the approval of the budget, photo: L.A.M
An addition of billions to the Ministry of Education.
Kindergarten (illustration), photo: GettyImages
At this stage, it is not clear whether the addition of a credit point for a tax benefit for parents of children up to the age of 18 at a cost of billions of shekels was included in the budget, but this could still happen in the future.
This is an important step to alleviate the cost of living, which stimulates employment and will increase the disposable income of many households by hundreds of shekels per month.
The approval of the state budget for two years, with a low deficit target at a time when the credit rating companies are anxiously following what is happening in Israel is significant and positive news for the economy which should support the shekel.
Why, then, on the day the budget was approved, the shekel fell by about 1.5% against the dollar and the euro?
Abnormal and destructive volatility for the economy
The political uncertainty surrounding the legal reform continues to cloud the shekel which has decreased sharply in the last month from the level of 3.36 to 3.66 at the time of writing.
The internal discord in the nation and the concern about the economic consequences of the reform, if it is approved in its current form, greatly worries the investors, the economists, the business sector and also the credit rating companies.
These concerns lead to abnormal and economically destructive volatility in the Israeli currency and may lead to a significant diversion of investments abroad.
The shekel's devaluation has already caused many inflation forecasters to raise their forecast for the coming year by 0.3%.
This means that even in the middle of the year, inflation is not expected to converge to the Bank of Israel's target of 1-3%.
As a result, the forecasts regarding the Bank of Israel interest rate also rose.
If until a month ago the expectation was that the Bank of Israel would stop the procedure of interest rate increases at the level of 4%, then today the interest rate has exceeded this forecast and stands at 4.25%.
The interest rate market is now pricing that the central bank's interest rate will rise to 4.85% - an increase of almost one percent over the forecast given just a month ago.
The Bank of Israel's target: one to three percent.
Governor Amir Yaron, photo: Oren Ben Hakon
money bills.
So why did the shekel weaken?, Photo: Reuters
There is no need to say much about the effect of the high interest rate and the high dollar exchange rate on the cost of living in Israel.
Prices of imported products, fuel, electricity, flights, mortgages will become more expensive, that is, the cost of living will rise despite the responsible budget that should take care of the cost of living.
So in the bottom line, Finance Minister Smotrich's approach to bring a restrained and not rampant budget is correct and professional, but if the divisions in the nation around the legal reform are not resolved, all the good reforms in the budget may become irrelevant.
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