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Intifada Strains Israeli Budget, Setting Stage for Coalition Rifts

April 30, 2002
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The economic cost of the Palestinian intifada is weighing heavily on ordinary Israelis — and on the unity government of Prime Minister Ariel Sharon.

After heated debate, the Cabinet on Sunday voted for emergency measures that would cut $2.7 billion from the budget and raise taxes to fund the increased defense spending necessitated by the intifada. But Sharon faces heavy opposition from within his government coalition.

Seventeen Cabinet ministers voted for the proposal, with nine voting against and one abstaining. The plan now goes to the Knesset for approval, though no date for debate has yet been scheduled.

Proposed by Finance Minister Silvan Shalom, the plan would reduce unemployment benefits, narrow welfare recipients, cut ministry budgets and raise taxes on cigarettes and fuel. There also is talk of creating a capital gains tax and tariffs on interest-bearing accounts.

“When we get to the Knesset, we’ll get rid of parts of this proposal,” Shlomo Benizri, the labor and social affairs minister and a member of the Shas Party, said in an interview with Israel Radio. “It won’t get passed in this present form.”

Nevertheless, changes are necessary to fund the additional spending necessitated by the country’s prolonged battle with the Palestinians and the concurrent economic slowdown.

With a $7 billion budget deficit, estimated economic growth of, at most, 1 percent — and perhaps even a contraction of 1.5 percent — and close to 300,000 Israelis unemployed, about 10 percent, the state needs to do something about its troubling macroeconomic figures.

The Knesset debate will come down to the demands of two government factions — the Labor Party and the fervently Orthodox parties of Shas and United Torah Judaism, which condemn many parts of the plan.

The 17 members of Shas are threatening to vote against the plan. If they do, it could be the end of the current government, precipitating a call for new elections.

For Shas, cuts to welfare spending and unemployment benefits would hurt its constituency, which is predominantly made up of Sephardic and fervently Orthodox Israelis.

The plan would cut unemployment benefits for anyone aged 18 to 21, and for those who have worked for less than a year in the 18 months before they registered with the country’s employment service.

Moreover, unemployed residents enrolled in Labor and Social Affairs Ministry retraining programs would only receive 70 percent of their unemployment benefits.

The Finance Ministry also is proposing a cut in child allowances, known as transfer payments, which are based on the number of children in a family. Under the plan, if at least one parent has not completed military service in the Israel Defense Force, the allowance for the third child will fall to around $31 per month from the current level of some $63 per month.

The child allowance cut was condemned by fervently Orthodox parties and the Israeli Arab community, who traditionally have larger families and do not enlist for military duty. Other allowances paid by the National Insurance Institute would be cut by 4 percent, with exceptions for disability allowance and pensioners with no other income.

Some skeptics say the Orthodox parties are posturing for leverage ahead of the Knesset debate, hoping to use the situation for the benefit of their voters.

“It’s just a matter of price,” scoffed Yosef “Tommy” Lapid, head of the secular Shinui Party. “This is what Shas does to make money off the government. God is the Shas treasurer.”

Labor also has signaled its resistance to the economic plan, but the left-leaning party is expected to toe the line, as it has throughout 14 months in Sharon’s coalition government.

Labor Party leader Benjamin Ben-Eliezer, who is also the defense minister, has said Labor — which has seven ministers in the 27-member cabinet — would vote against the plan unless the Finance Ministry drops the proposal to raise value added tax by one percent, to 18 percent, and freeze public sector wages for a year and a half.

Already last week, diesel fuel prices rose by 10 percent, while cigarettes prices were raised a shekel per pack, or about 20 cents.

Wage cuts would include a 5 percent decrease for elected officials and a wage freeze for public sector workers, many of whom already earn more than the average Israeli salary. There also would be a 4 percent cut in government spending, but not within the defense and education ministries.

Critics said the government plan lacks an overarching vision.

“It’s a pile of cuts and slashes, without a world view,” said Science, Culture and Sports Minister Matan Vilnai, a Labor member whose already tight budget would be cut further.

Yet the current economic situation isn’t solely due to the global slowdown and security situation, say economists, who also blame the country’s long-term economic policy.

“There’s no magic to create growth if the budget structure isn’t changed,” said Rimon Ben Shaul, chair of the economic committee of the Israeli Manufacturers Association. “We need a major change in the way we look at our economy.”

The association — which comprises Israel’s major industries — called upon the government to cancel tax benefits for settlers and in certain development towns. On Sunday, Shalom agreed to cut 50 percent of the tax benefits for some 500 towns and villages, including all the settlements in the West Bank and Gaza Strip.

The plan has elements that are headed in the right direction, but it doesn’t go far enough, according to Ben-Zion Zilberfarb, a Bar-Ilan University economist and former director general of the Finance Ministry.

The government needs to cut certain populist legislation, but it also needs further budget cuts across the board, he said.

“There need to be more cuts to the budget and fewer new taxes,” Zilberfarb said. “Leaving that would be a mistake.”

Nevertheless, a long-delayed proposal to tax capital gains and interest-bearing accounts may finally go into effect. While a government-appointed committee won’t submit any proposals until mid-May, experts predict taxes of 15 percent to 25 percent on foreign stocks and bonds.

There also could be a 25 percent tax on savings plans. The tax would be calculated on a sliding scale, based on the income of each taxpayer.

But Amir Peretz, chairman of the Histadrut Labor Union and a Knesset member, said the government should rethink the cuts so that they fall less on the middle class.

“Otherwise, the public gets only beatings from the stick, and never gets to taste the carrot,” Peretz said.

The Histadrut, which represents all public sector workers, is threatening to declare a work dispute with the government over the proposed economic plan. Work disputes generally mark a two-week countdown to a full national strike that can paralyze the country.

So far, Shalom has said he won’t make any decisions about wage freezes, but will negotiate with the Histadrut.

In the end, some kind of program will pass, Zilberfarb said.

“But instead of strengthening good elements and reducing bad elements,” he added, “the opposite will happen, and that’s my one worry right now.”

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