Israeli PM faces budget battle test

JERUSALEM - After successfully defeating a settlement legalization bill in the Knesset parliament last week, Israeli Prime Minister Benjamin Netanyahu's next big hurdle will be the allocation of the budget.

The 66-29 vote over sanctioning apartments in a disputed neighborhood in Bet El had been described as the first test of the stability for Netanyahu's recently formed unity government, and analysts saw his success as a sign that the premier was indeed in control over his very wide coalition.

Netanyahu's ability to halt or push through legislation -- despite opposition from both his own party and the coalition -- will once again be put to the test as the government starts preparing next year's budget over the next few weeks.

The new budget will include two major changes, the most important being a Finance Ministry "guns versus butter" bid to slash the defense budget to pay for significantly expanded social reforms.

The second measure is returning to an annual fiscal calendar after adopting a two-year plan -- the one Israel switched to at the outset of the global financial crisis in 2008.

"We don't even have the budget on the agenda yet, and whenever we do get it, it's weeks down the road. Netanyahu will easily pass it," Prof Reuven Hazan, of The Hebrew University of Jerusalem, told Xinhua on Sunday.

Hazan said he did not foresee any potential threat to the stability to the government over the pending budget allocations.

Where to cut, where to spend

The tug of war between defense and social spending ratcheted up a few notches after last summer's nationwide protests calling for a more equitable divvying up of the fiscal pie, and against spiraling housing and education costs.

The government-appointed Tratjenberg Commission, which addressed the protestors demands, earlier this year recommended a numbers of reforms, however, the question remains as to how to find funding for these changes.

Prof Eytan Gilboa, of Bar-Ilan University offered that the treasury could try and depict themselves as heroes, and the Defense Ministry and those who want to maintain or increase the defense budget, as the villains ahead of the upcoming negotiations.

Gilboa argued, as did Hazan, that when it comes to the inner workings of the government, Netanyahu would have the final word, and due to his high level of coordination with Defense Minister Ehud Barak, some kind of solution would be worked out to keep the government intact.

However, while it might be easy for Netanyahu to convince his coalition government about the need to keep or just slightly adjust the defense budget, the Israeli public might be much less willing to listen, according to Gilboa.

"Last year, the social protests were much more successful because the external threats were minimized," according to Gilboa. "Today, there is a good chance that [external threats] would be maximized, and when you have external threats maximized, then the public is faced with a dilemma: do you want a better life or do you want a more secure life?"

Gilboa listed three destabilizing fiscal factors: the continued regional instability following last year's "Arab spring," which brought an end the rule of Egyptian President Hosni Mubarak -- long considered a stable ally by Israel; the continued unrest in Syria; and Iran's alleged continued work to develop nuclear weapons.

If all of these developments were to continue, the defense establishment might ask for more funding, a message the Israeli voter might not be that interested in hearing.

Gilboa said that how the public would react to such a message all depends on "the way the public perceive the circumstances as real and not just an excuse for government inaction."

Two year stability

The proposed one-year budget, according to Prof. Michael Beenstock, of The Hebrew University in Jerusalem, offers less certainty to the economy because people now have more information where fiscal policy is heading.

"In my view, a two-year budget is more sensible than a one-year budget," Beenstock said.

"But, because of the general elections next year they can't make a two-year budget because this will tie the hands of the next government and that won't be democratic. So they now have to go back because of the election," he added.

General elections are scheduled to be held at the end of 2013.

"The view these days in macro-economics is that the more certainty you can provide to the public, the more stable the economy will be," Beenstock said.

Israel's decision to switch to a two-year budget was adopted by world bodies, among them the International Monetary Fund (IMF) and the Organization for Economic Co-operation and Development (OECD).