The recommendations that will probably not be implemented: Work on the revised state budget for 2024 is underway, and recently Budget Department head Yogev Gradus sent his recommendations to Finance Minister Bezalel Smotrich for fiscal coping with the economic consequences of the war in 2024.
Finance Minister Smotrich in a statement: "We have built a strong economy - we will pay the price of war"
Gradus' main recommendation is to implement "adjustment measures" (cuts and tax increases), totaling NIS 25-30 billion. On the agenda are the cancellation of coalition funds, the closure of between 15-17 government ministries, tax increases, reductions in wages and pensions for public sector employees, cuts in the budgets of various government ministries, and more.
"All fiscal anchors for 2024 indicate the need to carry out adjustment measures totaling NIS 25-30 billion, under the current reference scenario regarding the duration and intensity of the fighting, according to which the level of direct combat expenses net of US aid will be about NIS 2024 billion in 30," writes Gradus.
Distal Atabrian. Gave up the Ministry of Information. The Budget Department recommends closing another 15-17 offices, photo: Oren Ben Hakon
Last Friday, members of the Finance Committee and government ministers were presented with a Finance Ministry's report, according to which 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.
However, the Ministry of Finance recommends making do with a slight cut of NIS 25-30 billion, as a result of which the state budget deficit for 2024 will be increased on a one-time basis to a rate of 5.4%-.5%.
Where will the money come from?
The Ministry of Finance recommends reducing government expenditures by NIS 16 billion and increasing revenues by NIS 14 billion. According to a budget department document obtained by Israel Hayom, the government must promote a deep streamlining plan to reduce government expenditure by NIS 16 billion, according to the following components:
- In the first stage, it is proposed to close about 10 ministries according to a gradual plan, and later to adopt the report of the team for adjusting the government structure from 2016, which was formulated in accordance with international criteria, according to which the number of government ministries will be reduced to about 17-15 ministries. The move is expected to yield NIS 2 billion at full maturation
- Cancellation of coalition funds totaling NIS 5 billion for 2024
- Reduction of flexible operating budgets and focus of government ministries' budgets on the provision of core services totaling NIS 6.5 billion
- Advancing an outline of salary reductions and reduction of benefits for public sector employees, including budgetary pension arrangements, as well as freezing recruitment and cutting jobs in government ministries totaling NIS 3.5 billion
On the agenda: taxation of fuels and products harmful to health
On the revenue side, Gradus recommends tax increases totaling NIS 14 billion, in accordance with an economic priority scale as presented by the Chief Economist and the Tax Authority.
According to him, "Tax measures with economic benefits and positive externalities should be preferred, and reduction of benefits and tax distortions, including exemptions. Tax measures with positive external consequences, such as taxation of fuels and other polluting products and taxation of products harmful to public health, could total NIS 4.6 billion in 2024."
"Actions to reduce distortions in the tax system, such as canceling tax exemptions on capital or imports, may amount to an increase in revenues of about NIS 6.9 billion. Additional measures to increase income, such as correcting distortions in the collection of National Insurance contributions, could lead to additional revenues of about 1.2 billion."
Fuel. Will the price rise in 2024?, Photo: Joshua Yosef
Gradus further notes that his recommendations were formulated on the basis of principles that encourage growth: "Measures that can encourage growth should be prioritized by creating the conditions for increasing factors of production in the economy or by increasing productivity."
"The war will significantly increase the direct burden on taxpayers"
Gerdos goes on to warn of an "economic burden on taxpayers" and writes that "the war will significantly increase the direct burden on taxpayers, both because of the exceptional costs of fighting and because of the need to significantly increase the resources directed to the defense budget in the coming years."
"The ability to direct the fruits of growth over the past two decades to a significant reduction in the tax burden, without harming government services, is expected to decrease due to the tendency to increase defense spending and the need to increase the interest payment budget, as a result of the global interest rate environment and the increase in government debt."
Gradus concludes the letter by recommending – not new – to integrate the ultra-Orthodox population into the labor market. "The war will almost certainly increase the burden of security service on civilians. This burden has broad economic implications for both the economy and the individual – the length of military service and the length of reserve service cause a significant loss of GDP due to the negative impact on the labor market."
Haredim (archive). Increase the employment rate, photo: Gideon Markowitz
It added that "due to the overlap that currently exists between the working population and those serving in the IDF, increasing the direct burden in tandem with the intensification of the indirect burden, combined with demographic trends, is not sustainable over time. Consistent and long-term action must be taken to mitigate the negative impact of the war by reducing the economic burden on civilians and dispersing it over a wider population. This goal will be achieved through two main directions: one, a significant expansion of the working population out of the total population; The second is reducing the total burden by streamlining the government and the public sector."
"With regard to the expansion of the working population, measures that will increase the employment rate in designated populations must begin immediately. To this end, action must be taken to ensure that the entire population receives education that encourages employment, training and appropriate tools, and operates under the right economic incentives. The war did not detract from the challenges presented above. It sharpened existing challenges, intensified them, and dramatically accelerated the need for fundamental change to solve them," Gerdos said.
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