* Defence Ministry seeks $3.1 billion for 2015
* Economy Minister opposes increasing budget deficit
* Central bank chief wants spending restraint, tax rises
By Steven Scheer
JERUSALEM, Sept 4 Days after Israel reached a
ceasefire after 50 days of war against Hamas in Gaza, the
finance ministry and the central bank are at odds over how to
cover hefty defence costs in next year's budget.
Discussions on the 2015 spending package have just begun but
Finance Minister Yair Lapid and Bank of Israel Governor Karnit
Flug have already gone public with their opposing views.
The Gaza conflict, which ended on Aug. 26, has underpinned
hefty budget demands by the Defence Ministry of 11 billion
shekels ($3.1 billion) for 2015. The finance minister has said
the 9-billion-shekel cost of the latest fighting can be absorbed
in this year's budget with only a slight breach of the 3 percent
But covering extra military costs by raising taxes or
cutting expenses in civilian areas such as education or health -
especially when economic growth is softening - are politically
Prior to the conflict, gross domestic product (GDP) was
expected to grow 2.9 percent this year. It is now more likely to
grow 2.4 percent due to the economic disruption of the conflict.
Lapid, who plans to submit the budget framework to the
cabinet next week, has given few details other than suggesting
raising the deficit target to at least 3 percent of GDP from 2.5
percent while rejecting any tax increases.
He has said the economy cannot bear the burden of tax hikes
and spending cuts, a view challenged by Israeli financial
commentators who point to the euro zone crisis as a lesson in
the importance of holding down national debt.
"Raising the deficit is imposing taxes on our children,"
Economy Minister Naftali Bennett told an economic conference,
urging the Defence Ministry to use its funds more efficiently.
Flug advocates both spending restraint and tax increases and
would accept a deficit of 3 percent to cover to a one-time boost
in defence spending. But she warned of economic harm and a loss
of credibility if the deficit were any higher.
"If the military gets a higher budget, then 3 percent is not
attainable," Budget Director Amir Levy told Reuters. "It's going
to be between 3 and 3-point-something, like 3.2, 3.3," he said.
Alex Zabezhinsky, chief economist at the Meitav Dash
brokerage, believes even that is too optimistic due to
commitments including hiking public sector wages and exempting
some first-time home buyers from paying the 18 percent value
"If the government doesn't take any steps then the budget
deficit could go to 4.5 and 5 percent of GDP," he said, assuming
economic growth next year of 3 percent.
Such a scenario could have consequences on Israel's credit
rating but Standard & Poor's - which rates Israel A+ - believes
the 2015 budget expansion will likely be a one-time deviation
from a recent trend of falls in the deficit and debt burden.
"If the deficit is moved to 3.1 percent (of GDP) then it's
not a big shift but if it's 4 percent-plus, then that's a bigger
story," said Elliot Hentov, S&P's primary analyst for Israel,
adding that having a "vigorous debate" over the budget is
Some analysts believe Flug lacks the influence of former
central bank chief Stanley Fischer, who last year was able to
convince Lapid to backtrack after the minister sought to raise
the 2013 deficit target to nearly 5 percent of GDP.
Lapid, who seeks to return to a lower deficit in 2016, was
tapped as finance minister last year after his new Yesh Atid
(There is a Future) party became the second largest political
faction on the promise of lowering the cost of living for the
The former TV presenter, who has admitted he had no
knowledge of economics, has been criticised as populist for some
of his proposals including a "zero VAT" plan.
"Lapid is not really thinking about what has to be done
about Israel's economic problems. He is thinking about what he
has to do in order to get to the next elections in a better
situation than his current one," financial commentator Avi
Temkin wrote in the Globes financial newspaper, adding the same
applied to Prime Minister Benjamin Netanyahu.
Netanyahu, analysts agree, will ultimately have to decide
how much of its wish list the defence ministry gets next year.
"It depends on whether Netanyahu is afraid of the
geopolitical situation," said Modi Shafrir, chief strategist at
Mizrahi-Tefahot Bank's finance division. "Eventually, Netanyahu
will probably decide something in the middle - between what
Lapid and Flug ask for."
That probably means a deficit target of about 3.25 percent
next year, he said.
"We hope we will find a way to balance the military's needs
and the civil needs," Levy said.
(1 US dollar = 3.5771 Israeli shekel)
(Reporting by Steven Scheer; Editing by Ruth Pitchford)