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P 212043Z JUL 09
FM SECSTATE WASHDC
TO AMEMBASSY TEL AVIV PRIORITY 
TREASURY DEPT WASHINGTON DC 0000

UNCLAS STATE 076107 
 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EAID IS
SUBJECT: USG AND ISRAEL AGREE ON SPENDING LIMITS, FISCAL 
RULE 
 
¶1.  (SBU) Summary:  At the June 29 meeting of the U.S.-Israel 
Joint Economic Development Group (JEDG), the USG and GOI 
delegations agreed on conditions that would govern the 
decision to release FY 2010 and FY 2011 tranches of loan 
guarantees. These conditions support fiscal discipline in 
Israel,s combined 2009-2010 budget and encourage medium- and 
long-term fiscal governance.  Leading the USG delegation, EEB 
Acting A/S Nelson and Treasury Acting A/S Baukol commended 
Israel,s strong economic performance since the inception of 
the loan guarantee program in 2003 and noted that Ministry of 
Finance (MOF) support for fiscal discipline has helped Israel 
to better withstand the global financial crisis.  MOF 
Director General Yarom Ariav, who led the GOI delegation, 
stated that conditionality established by the JEDG &helps us 
to help ourselves.8  OMB and CBO representatives also 
participated in the JEDG to help the MOF establish stronger 
fiscal accountability mechanisms and move toward implementing 
a new fiscal rule.  The agreed conditions also address 
Israeli food import standards and IPR protection.  Acting A/S 
Nelson noted Bank of Israel Governor Stanley Fischer had 
expressed interest in exploring further how the JEDG process 
can advance our bilateral economic relationship, but 
explained that the new Under Secretary for Economic, Energy 
and Agricultural Affairs would evaluate all bilateral 
dialogues upon taking office.  The USG and GOI agreed to 
steps for verifying GOI compliance with the agreed conditions 
and to a mid-year review. Media reports on the JEDG outcome 
have been fairly accurate.  End Summary. 
 
--------------------------------------- 
FISCAL CONDITIONS FOR 2009-2010 BUDGET 
--------------------------------------- 
 
¶2.  (U)  While the JEDG usually meets once a year, the June 
29 meeting was the first since March 2, 2007.  USG and GOI 
scheduling conflicts prevented a JEDG meeting in 2008. 
 
¶3.  (U)  The outcome of the JEDG meetings is an appendix to 
the loan guarantee agreement (LGA) that spells out conditions 
the GOI must meet in order to be able to issue bonds backed 
by a USG guarantee.  At the June 29 meeting, the USG 
delegation agreed to support the GOI,s proposal for 2009 
real spending growth of 1.7 percent plus 1.35 percent (3.05 
percent in all) over 2008 expenditures, and 2010 real 
spending growth of 1.7 percent over 2009 expenditures.  The 
USG also supports a 2009 deficit cap of 6 percent of GDP and 
a 2010 deficit cap of 5.5 percent of GDP. 
 
¶4.  (U)  On the spending growth and budget deficit targets, 
DG Ariav stated that fiscal conditionality under the loan 
guarantee agreement has contributed to Israel,s strong 
economic performance since 2003 and ability to withstand the 
impact of the financial crisis.  The 3.05 percent real 
spending growth in 2009, he emphasized, would only be a 
temporary measure, and the budget is slated to return to its 
path of 1.7 percent annual growth starting in 2010.  Bank of 
Israel Research Director Karnit Flug, however, stated that 
the current glide path of government spending would push 
spending above 4 percent after 2011, and that the GOI would 
have to cut current commitments to achieve its 1.7 percent 
goal. 
 
------------------------------ 
MEDIUM-TERM FISCAL DISCIPLINE 
------------------------------ 
 
¶5.  (U)  The GOI agreed to create a long-term budget analysis 
of Israel,s future social expenditures, including unfunded 
social mandates (such as health and pension system spending) 
and to present a roadmap to the USG during the 2009 mid-year 
review or 2010 JEDG that outlines the implementation of a new 
medium-term fiscal rule.  The fiscal rule roadmap would guide 
expenditure growth and budget deficits through 2015 or a 
later date. 
 
¶6.  (U)   Office of Management and Budget Deputy Associate 
Director for Economic Policy Michael Falkenheim chaired a 
roundtable discussion focused on Israel,s fiscal rule 
options.  Bank of Israel Director of Research Karnit Flug 
advocated an algebraic rule that directly connects annual 
spending caps to a medium-term fiscal goal, such as a 60 
percent debt-to-GDP ratio, which she suggested Israel would 
meet by 2020.  DG Ariav proposed medium-term spending and 
deficit caps without a direct connection to the debt-to-GDP 
ratio.  Both admitted that the primary issue for any rule is 
enforcement*for now, spending plans in the Knesset must only 
show projections that comply with the rule for three years. 
DG Ariav and Ms. Flug proposed to reform Knesset spending 
rules to make all plans comply with the fiscal rule in the 
long run.  When pressed about when Israel will implement a 
new fiscal rule, DG Ariav stated that the Knesset will take 
up the issue after it passes the 2009-10 budget in mid-July. 
DG Ariav noted there is already much discussion within the 
GOI about adopting a framework that relies less on inflexible 
spending caps and more on achieving medium- and long-term 
fiscal goals.  Falkenheim emphasized the importance of both 
enforcement mechanisms and escape clauses to provide 
credibility and flexibility to a fiscal rule mechanism. 
 
¶7.  (U)  Congressional Budget Office Deputy Director Robert 
Sunshine provided an overview of the U.S. budget process and 
discussed the role of non-partisan budget oversight. Sunshine 
emphasized the desirability of a budget watchdog as a source 
of MOF credibility in budget discussions with the Knesset, 
and as a tool to resist overt political influence from other 
parts of the government in the budget drafting phase or 
formulation of budget  projections.  Sunshine also advocated 
the idea of a &Pay-Go8 system for Israel, in which future 
spending proposals would have to be offset by compensating 
increases in taxation, other revenue, or spending cuts.  The 
GOI delegation was receptive but non-committal to Mr. 
Sunshine,s presentation. 
 
---------------------- 
OTHER ECONOMIC ISSUES 
---------------------- 
 
¶8.  (U)  Acting A/S Nelson noted USG concern that Israeli 
food import standards are unclear, and trade and standards 
agreements established with the European Union put U.S. 
exporters at a disadvantage.  He pointed out the lack of 
published guidelines and regulations cause significant delays 
for U.S. companies.  The GOI agreed to provide to the USG 
answers about safety standards required for the import of 
food to Israel. 
 
¶9.  (U)  Acting A/S Nelson raised intellectual property 
rights (IPR) protection, noting the USG continues to urge the 
GOI to make sufficient resources available to the Ministry of 
Health for faster pharmaceutical marketing approval and to 
make patent law reforms that extend the term of patent 
protection.  The GOI agreed to continue consultations with 
the USG regarding levels of IPR protection. 
 
¶10.  (U)  The USG agreed to support the GOI,s structural 
reform targets outlined in the 2009-2010 budget.  These 
include privatization of Israel,s state-owned seaports, 
implementation of private sector participation in electricity 
production, and progress on a reform of Israel's land 
authority. 
 
¶11.  (U)  The USG confirmed, in its term sheet, that the 
amount of loan guarantees released for use to Israel is 
$3.148 billion, subject to statutory deductions.  The FY2010 
and FY2011 tranches of $333 million each will be released for 
use after Treasury and State confirm that Israel has met the 
conditions signed in Appendix 10 of the Loan Guarantee 
Commitment Agreement (LGCA), dated June 29, 2009. 
 
¶12.  (U)  Acting A/S Nelson recognized Bank of Israel 
Governor Stanley Fischer had expressed interest in continuing 
the JEDG process as a way to advance U.S.-GOI economic 
cooperation.  Acting A/S Nelson noted the JEDG would be one 
of many bilateral economic dialogues the new Under Secretary 
for Economic, Energy, and Agricultural Affairs would have to 
consider upon assuming office.  DG Ariav stated he was not 
aware of Fischer,s interest in using the JEDG process to 
deepen the bilateral economic relationship; he acknowledged 
the need for the incoming Under Secretary to establish his 
own priorities. 
 
----------------------------------- 
REVIEW OF GOI ECONOMIC PERFORMANCE 
----------------------------------- 
 
¶13.  (U)  The USG confirmed that the GOI sufficiently met the 
conditions for the release of FY 2008 and FY 2009 tranches of 
loan guarantees, subject to statutory deductions. 
 
¶14.  (U)  The USG and GOI agreed at the June 29 meeting that 
the Ministry of Finance would release reports to the U.S. 
Departments of State and the Treasury in March 2010 and 2011 
detailing Israel,s progress on each of the agreed 
conditions, including a budget breakdown showing central 
government expenditures and deficits in 2009 and 2010. 
Within two months of receipt of the GOI,s March 2010 and 
2011 reports, the USG will make a written determination 
whether Israel has met the conditions and whether the USG 
would agree to release the FY 2010 and FY 2011 tranches of 
guarantees, subject to deductions. 
 
¶15.  (U)  The USG and GOI also agreed to establish a mid-year 
review of conditions associated with the FY 2010 and 2011 
loan guarantee tranches during which the USG and GOI could 
amend conditions and introduce new subjects for discussion as 
needed, through a new appendix. Israeli Embassy Economic 
Counselor Asaf Vitman proposed the mid-year review be held in 
December 2009 in conjunction with a major economic conference 
in Israel.  Vitman also invited CBO Director Elmendorf and 
OMB Director Peter Orszag to attend both the conference and 
the review. 
 
--------------- 
MEDIA REACTION 
--------------- 
 
¶16.  (U)  Upon conclusion of the JEDG, both the USG and GOI 
released press statements outlining the major outcomes of the 
meeting and the conditions connected to FY2010 and FY2011 
tranches of guarantees.  The U.S. Department of the Treasury 
press release also attached Appendix 10 of the LGCA, signed 
at the JEDG on June 29. 
 
¶17.  (SBU)  Israeli press reports characterized the JEDG as a 
"re-approval" of U.S. loan guarantees.  Ha,aretz and the 
Associated Press correctly cited that $3.14 billion currently 
available to be drawn by the GOI is subject to statutory 
deductions, and explained that another $600 million would be 
released for use if Israel meets 2009 and 2010 conditions. 
The Jerusalem Post, however, erroneously reported that the 
U.S. released $3.8 billion in guarantees to Israel. Both 
articles failed to mention explicitly that, as the U.S. has 
not made a deduction from loan guarantees since 2005, Israel 
will likely not be able to draw on the full $3.14 billion in 
guarantees that is currently available. 
 
 
CLINTON