VZCZCXYZ0001
RR RUEHWEB

DE RUEHTV #0457/01 0571455
ZNR UUUUU ZZH
R 261455Z FEB 10
FM AMEMBASSY TEL AVIV
TO RUEHC/SECSTATE WASHDC 5665
INFO RUEHXK/ARAB ISRAELI COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
RHEHNSC/NSC WASHDC

UNCLAS TEL AVIV 000457 
 
SENSITIVE 
SIPDIS 
 
NEA/IPA FOR FRELICH, GOLDBERGER; EEB/IFD FOR PERDUE; 
TREASURY FOR BALIN 
 
E.O. 12958: N/A 
TAGS: ECON EFIN IS
SUBJECT: MINISTRY OF FINANCE PROPOSES TWO-YEAR BUDGET AND 
NEW FISCAL RULE 
 
REF: TEL AVIV 194 
 
 ¶1. (U)  Summary:  In a press release dated February 22, the 
Ministry of Finance announced its intention to propose 
another two-year budget (2011-2012) and a new fiscal rule to 
the government in the coming days.  The proposals have been 
agreed to by the Prime Minister and will be presented to the 
Knesset following approval by the government.  The Ministry 
characterizes these two proposals as a "revolution in the way 
the government manages the Israeli economy and the state 
budget."  GoI officials strongly hinted at these outcomes in 
meetings with USG officials during the Joint Economic 
Development Group mid-term review in December 2009 (see 
reftel.) Local commentary on the proposals has been largely 
positive, with strong criticism coming only from the most 
conservative.   Sever Plotsker, the chief economic columnist 
at Israel's largest circulation daily, noted the commitments 
made by the GoI to the US to secure the loan guarantees.  End 
Summary. 
 
Two-Year Budget 
--------------- 
 
¶2.  (U)  Finance Minister Yuval Steinitz has been a vocal 
proponent of the two-year budget, determined to move it out 
of the realm of crisis-management tool and into normal 
practice.  Touting the benefits of stability and long-term 
planning, Steinitz received  an extra boost when IMF and OECD 
visiting delegations praised the two-year budget introduced 
when the Netanyahu government took office last spring as a 
positive policy measure in light of the crisis.  The press 
release cites the main advantages as the enhanced ability of 
ministries to plan their activities for a limited period of 
time in accordance with their budget, and the freeing up of 
administrative time and energy from continuously dealing with 
the budget toward focusing on strategic thinking and building 
long-term plans.  Critics note the difficulty in credibly 
planning for two years and the subsequent need to constantly 
adjust the budget, as happened in 2009 when increased 
expenditures were required for the defense and health budgets 
just two months after the budget was approved. Given the 
geopolitical unknowns, some say a two-year budget lacks the 
flexibility Israel sometimes requires.  However, as we saw 
with the last adjustments, the current administration found 
little difficulty in getting them passed.  The political 
calculation seems to be that the risk of opposition to future 
budget adjustments is small and well worth the stability 
gained. 
 
 
Revised Fiscal Rule 
------------------- 
 
¶3.  (U)  After months of discussion between the Ministry of 
Finance (MoF), the Bank of Israel and the National Economic 
Council (NEC) within the PM's Office, an agreed-upon formula 
to set the increase in government expenditures from year to 
year has finally emerged.  The new rule sets the rate of 
increase of expenditures as a multiplied factor of the 
distance from the debt goal within average growth rate of the 
preceding ten years.  The desired debt-to-GDP ratio has been 
set at 60 percent (as in the Maastricht treaty) and the 
10-year average growth rate (2000-2009) has been calculated 
at 3.5 percent.  Israel's current debt-to-GDP ratio is 79.9 
percent.  Therefore, the calculation of expenditure for 2011 
yields a figure of 2.6 percent.   (3.5 percent times the 
ratio of 60 percent over 79.9 percent equals 2.6 percent.) 
The Ministry of Finance cited the following guidelines in 
formulation of the new rule:  simplicity, absence of 
forecasts to ensure transparency, short and medium-term 
applicability to ensure sustained credibility and avoiding 
pro-cyclical policies that could exacerbate a recession 
during an economic crisis. 
 
¶4.  (SBU)  The Finance Ministry highlighted the key point of 
consensus in designing the new rule as the continued 
reduction of the debt-to-GDP ratio, noting the long range 
goal of the 60 percent target in the Maastricht treaty.  The 
medium range goal is likely 70 percent.  In addition to 
guarding economic stability against external shocks, Israel's 
high geopolitical risk and accompanying high defense 
expenditures also fed into the consensus requiring the 
continued decrease of the debt-to-GDP ratio.  Demographic 
changes (aging population) and the need to free resources 
within the budget by reducing debt servicing costs also 
played a role. The declining deficit ceiling, as determined 
 
by law, remains unchanged. 
 
 
Positive First Impressions 
-------------------------- 
 
¶5.  (U)  The local economic commentators who were early to 
seize on the news of the proposals have largely applauded the 
two-year budget and fiscal rule, citing the increased 
expenditure ceiling for 2011 as the correct response to the 
public's dismay at under-funded public services over the last 
20 years of conservative budgeting. The heightened sense of 
certainty in the government's budget policy that both 
proposals support solicited praise, as well as the fiscal 
rule's clear mechanism for downward adjustment of the 
debt-to-GDP ratio.  Bank Leumi commentators noted the 
importance of this figure to international actors such as the 
IMF, OECD and rating agencies.  Yediot Aharonot's (Israel's 
largest circulation daily) chief economic commentator, Sever 
Plotsker, criticized the artificial "boxes" the GoI employed 
under the previous fiscal rule, which provided the government 
the ability to make unique expenditures in times of need that 
were not included in the previous 1.7 percent per year 
expenditure ceiling.  The new rule, he says, finally puts an 
end to this fiction.  Plotsker also cited the government's 
use of the 1.7 percent ceiling as a handy tool to convince 
Knesset members and spending ministries to toe the line, as 
the ceiling was touted as a specific commitment to the U.S. 
in exchange for the loan guarantees.  The most strident 
criticism of the proposals thus far has come from Ha'aretz's 
ultra-conservative economic commentator, Nechemia Strassler, 
who viewed the fiscal loosening that the new rule allows in 
2011 as a betrayal of the MoF's, especially the Budget 
Division's, responsibility to keep a tight rein on 
inefficient  and wasteful public sector spending.  Without 
referring to the specifics of the formula. he surmises that 
this is the beginning of a negative trend. 
 
 
¶6.  (SBU)  Comment: While the MoF's announcement is mute on 
escape clauses and enforcement mechanisms, the simplicity of 
the new fiscal rule and its emphasis on declining debt hit 
the right mix for the current environment.  Post will engage 
with contacts at MoF, NEC and Bank of Israel to gauge their 
impressions of the cooperation in coming up with the formula, 
as well as the feedback they have received from across the 
business and economic spectrum.  As building of the 2011-2012 
budget gears up, we expect to see a more collaborative 
process with spending ministries and an effort to employ 
long-term budget projections that will fit into the new 
fiscal rule's framework. 
Cunningham