The consequences of the war and poor budgetary management are making their mark, and the deep budget hole that awaits us in 2024 is beginning to become clear: in order to meet the permitted deficit target for 2024 (2.25%), sharp cuts totaling NIS 67.2 billion are needed – a huge sum equivalent to the Ministry of Education's budget for an entire year. This is according to the "report on the expected differences" in the 2024 budget, compared with the budget approved only in May of this year. The report was submitted Friday to members of the Finance Committee and government ministers ahead of a discussion on the issue next week.
Voting on the State Budget for 2023 // Knesset Channel
If the government does not take "adjustment measures" in the budget (cuts and tax increases), the deficit in the state coffers will be 5.9% of GDP.
What is the Difference Report?
According to Basic Law: The State Economy, the government must publish the report by November, but because of the war, its publication has been delayed until today.
This is a comparison of economic data that were known when formulating the budget for 2024 with the data known today (forecasts of state tax revenues and government expenditures for next year). Since the budget for 2024 was approved by the government in May of this year, and since then forecasts have changed dramatically, mainly due to the war, adjustments are needed.
Downgrade on the way?
Finance Minister Smotrich in a statement: "We have built a strong economy - we will pay the price of war"
According to the Ministry of Finance, state tax revenues are expected to be NIS 35 billion lower than the forecast given in June.
On the expenditure side, war needs will cost at least NIS 39.6 billion, in addition, the government will have to increase expenditures by an additional NIS 8.8 billion in order to correct the erroneous forecasts made in May 2023. In other words, overall expenses are expected to increase by NIS 48.4 billion, compared with the forecast.
As noted, if the government does not carry out "adjustment measures," the deficit in the 2024 budget will reach at least 5.9 percent. The main danger of such a high deficit is the downgrade of the credit rating – all rating agencies have already announced that they are examining this step shortly after the war began. A downgrade in the credit rating is liable to lead to a financial crisis, market falls, currency erosion and, as a result, a decline in the standard of living.
Maintaining investor confidence is essential
In this context, we note that in the report, the professional echelon of the Ministry of Finance warns of a "deterioration in investor confidence in the government," noting that this is one of the downward risks to the forecast for 2024.
Minister of Finance Smotrich, photo: Oren Ben Hakon
"Maintaining investor confidence in the government is essential to ensuring continued foreign and domestic investment in the economy, and will enable the government and the business sector to adequately finance the costs of fighting and recovery from it," the officials said.
"To the extent that the ability to reflect the existence of responsible fiscal policies and government policies supporting sustainable growth diminishes, this may undermine investor confidence in the government. Therefore, government and Knesset decisions that will be reflected in the expected revision of the budget for 2024, including the adoption of structural reforms and the reallocation of sources, have the potential to have a high impact on investor training as stated."
It's not enough just to increase a deficit
In other words, the Ministry of Finance says that it is not enough to increase the deficit and that budgetary responsibility must be shown and unnecessary expenditure cuts must be made. Does the Minister of Finance intend to do so?
Bank of Israel Governor Prof. Amir Yaron, Photo: Oren Ben Hakon
The first hint was given this week – the finance minister is not interested in getting into disagreements with coalition members at this time. At the ceremony extending the Governor's term, Smotrich said: "We stand now, my honorable and partners in managing the Israeli economy, at a crossroads in which we will have to make a courageous decision in this context regarding the 2024 budget."
"Should we enter this minefield of priorities and inevitably ignite the fire of disagreement, or find a way to skip over it, find a way to become more efficient, reduce expenses and increase revenues, but do so in the consensus space? I believe that this is what is right at this time and look forward to cooperation on this matter from you, my honorable friends – the Prime Minister, the President and the Governor."
"Political corruption and national irresponsibility"
The opposition attacked the government's budgetary conduct over the publication of the report. MK Vladimir Belyak (Yesh Atid), the center of the opposition in the Finance Committee, said today that "the wanton management of Netanyahu and Smotrich is beginning to exact a heavy price from the Israeli public."
MK Vladimir Belyak, Photo: Oren Ben Hakon
Belyak added, "According to Basic Law: The State Economy, the government was obligated to publish the report by November, but on October 7 the war broke out and Smotrich found a perfect excuse to postpone publication. The postponement was especially important until after the approval of the revised budget for 2023, in order to meet the goals of coalition looting, without revealing to the Israeli public the significance of looting during the war."
Beliak added: "In the revised budget for 2023, they knew that an additional NIS 30 billion was needed to finance the needs of the war. At the same time, they already knew that there was a budget hole in revenues of at least NIS 25-26 billion. All these data, to which they, unlike the public, were exposed did not cause them to cut coalition funds and close the unnecessary ministries. This is not an omission. It's a crime."
According to Beliak, the significance of the difference report is "a severe budget crisis and a downgrade in the credit rating of the State of Israel. NIS 67.2 billion is a monstrous budget hole, higher than the Health Ministry budget. It is not bound by reality. It should have and had to be handled differently. These frightening numbers are a direct result of political corruption and an extreme lack of national accountability."
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