Israel Girds for Tough Battle over Cuts in Next Year’s Budget

While the world’s attention focuses on Israel’s battle against Palestinian terror, the country is fighting on a second front as well — the economic one.

Israel’s government is looking for ways to halt the downward spiral caused by the double whammy of the high-tech bust and the precipitous drop in tourism since the intifada began.

On Sunday the Cabinet agreed, in a 14-13 vote, to shave $1.46 billion from next year’s budget. That comes on top of a $1 billion cut in August.

Slashing the budget will “put the economy back on the path of growth and employment in the second half of 2002,” said the director general of the Finance Ministry, Ohad Marani.

As a result of the latest cut, he predicted, “the economy will be able to return to its growth potential of 4 percent” next year.

Agreeing to make some cuts is one thing; deciding what to cut is quite another.

Israel’s annual budget debate is always long and hard-fought, pitting the prime minister against Knesset members whose votes depend on funding for their constituencies.

The budget can be the straw that breaks a government’s back: Under Israeli law, if a prime minister cannot pass his budget or at least extend the current one, his government will fall.

Failure to pass his budget in December 1998 marked the beginning of the end of Prime Minister Benjamin Netanyahu’s administration.

In the coming days, Cabinet ministers will begin deciding where to slash.

Despite continuing Palestinian violence, as much as $25 million could be cut from the defense budget.

Cuts in social services and education also are expected, likely drawing howls of protests from politicians representing the weaker sectors of society.

The debate already has created fissures in Prime Minister Ariel Sharon’s coalition.

Of the 13 ministers opposing the latest cut, seven were from the Labor Party and five were from the fervently Orthodox Shas Party. Education Minister Limor Livnat, a member of Sharon’s Likud Party, also opposed it.

Faced with further fractiousness ahead, Sharon summoned coalition leaders to discuss the cuts. For now, he hopes to keep his coalition together by a common concern for the country’s economy.

Meanwhile, Sharon and Finance Minister Silvan Shalom are vowing not to raise taxes to make up for a shortfall in revenue caused by the recession.

“Something has changed in the world since Sept. 11: Countries have dropped forecasts, and here tax revenue has plummeted in the past few months,” the Finance Ministry’s Marani said. “By making these cuts and raising the deficit target we will avoid a real financial crisis.”

Yet there is one area of spending that may not be affected — transportation infrastructure.

Plans to finance bypass roads, six-lane highways and double-decker commuter trains are in the works. The hope is that a more developed transportation infrastructure will alleviate traffic congestion, create more jobs and spur economic growth.

Infrastructure investments are on the increase and now total more than $1.5 billion. The figure includes $1 billion for roads and highway arteries through various private financing initiatives.

“With all the great plans, the question is how much will actually be implemented,” said Gil Bufman, Bank Leumi’s chief economist. “It seems clear to everyone that infrastructure is perhaps the lifeline for Israel and could be a major factor in helping the economy to turn around.”

During Sunday’s Cabinet meeting, the government also agreed to raise the limit of deficit spending from 2.4 percent to 3 percent of the gross domestic product.

This decision was criticized by the governor of Israel’s Central Bank, David Klein, who said it could harm the economy’s ability to grow.

Klein also said the planned increase in the country’s deficit could harm Israel’s ranking in the world’s financial markets, a development that could hurt foreign investments.

The latest surge in violence, which began in late November, came at a particularly bad time for Sharon. Shortly before, he had boasted that the security situation was under control, allowing him to turn his attention to socioeconomic matters.

With the Dec. 31 deadline fast approaching, the government must devote as much attention to the budget as possible given the ongoing fighting with the Palestinians.

During his recent visit to Washington, Sharon asked for guidance from President Bush, complaining that the economic situation was aggravated by the intifada, which required unforeseen expenditures.

In response, Bush sent Alan Larson, the State Department’s undersecretary for economic, business and agricultural affairs, to Jerusalem.

According to Larson, if the Israeli government carries out the necessary cuts and measures, a real crisis can be avoided.