TODAY IS MERIDOR-S DAY - 08-Dec-96

TODAY IS MERIDOR'S DAY

(Article by Ze'ev Klein, "Globes", Dec 8, 1996, p.57)

POLITICAL, IDEOLOGICAL AND ECONOMIC REASONS WILL TURN MINISTER DAN MERIDOR INTO THE HERO OF THE DAY AT TOMORROW'S CABINET MEETING. MASSIVE SOFTENING UP, AIDED BY OUTSIDE ECONOMISTS AND IN COOPERATION WITH THE PRIME MINISTER, WILL BRING ABOUT THE APPROVAL OF THE FULL NIS 7 BILLION CUT IN THE BUDGET.

Tomorrow (09.12.96) is supposed to be Finance Minister Dan Meridor's big day. After having recently experienced severe disappointments, it looks as though the Finance Minister will celebrate a huge victory and receive broad support for the proposed additional cuts to the 1997 budget.

Ministers and MKs say that such a victory would buy Meridor a large cache of merit points, which are essential to the improvement of his public and political reputation. Ever since he suffered a severe blow at the cabinet meeting on the recommendations of the second Brodet Commission on the issue of the capital markets, Meridor has changed his colors. In the past few weeks, he has taken the public by storm and opened a frontal assault against the "social lobby" and those who opposed the original NIS 4.9 billion cut. Meridor did not flinch from the threat of the Levy brothers Maxim and David who, according to him and in the name of the weaker strata, are willing to torpedo the plan to rejuvenate the economy.

To those close to him, Meridor has made it clear that he will not be surprised again at a cabinet meeting, and that he will not agree to a defeat like that which occurred with the Brodet Commission. The renewed backing of Prime Minister Benjamin Netanyahu has pushed Meridor forward and strengthens the fighting spirit for passing the additional NIS 2 billion cut, and the full NIS 7 billion cut, in the Knesset at the end of the month.

During the past few months of his term, Meridor has been a "Finance Minister without portfolio" and Netanyahu has stood on the sidelines and allowed ministers and MKs particularly from Gesher to weaken him and damage his reputation. Now, Netanyahu and Meridor are together in a united front for the approval of the budget cuts and restrictions. The background for this is mainly political. First, passing the budget cuts in the Knesset without new taxes is a real test for Netanyahu. Second, after the redeployment from Hebron and before the final settlement with the Palestinian Authority, the Prime Minister needs true allies like Meridor.

The Budget Department is not the father of the additional cuts. The entire process is the initiative of the Prime Minister's Bureau, which at the outset set forth the amount and formula for the additional cuts. It was established at the start that the ministers would be completely free to set for themselves the optimal cuts in their own ministries' expenditures. In other words, each minister would establish in which sections of the budget there would be cuts, in accordance with the Finance Ministry's guidelines. The purpose of this was to implement wide cuts in ministerial spending, in which each ministry would be required to cut a certain percentage of its spending, without harming wage agreements, regulations, or the weaker strata. According to the formula for the cuts, the level of cuts will be higher up to 10% in smaller ministries, and up to 4% in larger ministries. A majority of the cuts will be in acquisition budgets, investment and infrastructure, and in wage expenditures.

Deputy Director-General of the Prime Minister's Office Moshe Leon said: "The additional cuts will prevent a depression. For the good of the country, it is better that the process not be harmed and that the budget cuts be carried out without new taxes." According to Leon: "It won't be a disaster if some of the cuts are carried out by cancelling exemptions and through reductions in property taxes, the health tax and national insurance. Neither new taxes, nor an increase in the burden of overall taxation, is being considered. Raising the sales and income taxes are the worst possible moves."

Last week, the Finance Minister was in a non-stop race to hammer out a broad agreement for the cuts. Everyone made a pilgrimage to him, including Minister of National Infrastructure Ariel Sharon. Today, Meridor is scheduled to meet with Ministers Natan Sharansky and Yuli Edelstein from Yisrael B'aliyah, Education Minister Zevulun Hammer and the Gesher faction. Meridor indicated that he would be prepared to give up the cuts regarding children, if he was presented with a good alternative from an economic perspective, and the Knesset approves a cut of NIS 7 billion. He even showed flexibility in the matter of paying a convalescence fee for a visit to the doctor.

As of now, it will pass. Opposition by the ministers is to low key decrees in contrast to previous years. Education Minister Zvulun Hammer: "We are all part of the economic network, but there are red lines that cannot be crossed. There are things that the government cannot agree to, such as cutting the hours of study." Transportation Minister Yitzhak Levy: "The struggle over the budget will end on 31 December. I will support the additional cuts on condition that transportation infrastructure and investment in the roads not be damaged." Health Minister Yehoshua Matza: "I am not conducting this war cut or no cut. The government is aware of the problems in the health system and I have to look ahead to 1997 and 1998. There must be a package deal to revitalize the system and bring it some balance." Deputy Housing Minister Meir Porush: "There are cuts and there are constraints. We will hear everything. The Finance Minister promised me that there will not be any cuts in mortgages."

As always, the harshest struggle will be on the defense budget. Netanyahu declined IDF requests to add another NIS 3 billion to the 1997 defense budget, but clarified that he would be prepared to increase the defense budget if necessary. The Prime Minister allowed the IDF leadership to present their claims on this issue. Chief-of-Staff Amnon Lipkin Shahak: "The government must decide in coming years to either allocate more money, or there will be a need to decrease the size of the military. We will win the next war, but there will be more killed and injured." Defense Minister Yitzhak Mordechai: "The defense budget must be increased. In my opinion, the Prime Minister is correct. How can it be that the Finance Minister argues with the Prime Minister? I have no doubt that the defense budget will be eroded in the coming years, leading to an inability to sufficiently build up against future external threats."

In anticipation of the big confrontation over the budget in the cabinet and Knesset, Meridor recruited a large group of economists and economics professors to his side. All of them had the same message: if the large deficit in the budget is not dealt with, there will be an economic collapse; a cut that also includes raising new taxes, will lead to depression and increased unemployment. Former Bank of Israel Governor Professor Michael Bruno said: "Budget cuts will make possible changes in the exchange rate. It will permit interest rates to be lowered, and will facilitate a considerable rise in exports. In the circumstances of the Israeli economy, it is not possible to make a serious cut in the budget if it is done only in the welfare sphere and not in the defense sphere. The talk about raising the defense budget contradicts the Prime Minister's commitment to cut the budget."

Former Bank of Israel Deputy Governor Professor Tzvi Zussman: "The budget cuts are the necessary and required step. If the full budget cut is not carried out in 1997, it would be better to raise taxes than increase the deficit. Increasing the deficit is like printing money, and that is the worst possible step and will only increase inflation. There must be a major effort to implement the full NIS 7 billion cut. If increasing taxes is necessary to prevent a deterioration in the deficit, it must be done with a variety of taxes and all at once. There must be no flinching from raising the sales tax, even by 2%."

Professor Chaim Ben-Shahar: "If we had 7% growth last year, we are currently on a track which is several points lower. The basic problems in the economy have not yet been resolved and the primary problem is the country's budget. The large deficit is is causing high interest and a low exchange rate. If the government succeeds in in getting the Knesset to pass NIS 7 billion in cuts, I will be alot more optimistic regarding what will happen next year. Should it decisively fail, the results for 1997 will be decisively negative."

Meridor's leadership exercise on the budget issue is also designed to make it clear to Bank of Israel Governor Professor Jacob Frenkel what is expected of him on 1 January. Meridor and Netanyahu are openly complaining about the high interest rates and the damage to exports and the economy, and are demanding that Frenkel carry out a substantial reduction in interest rates in order to considerably accelerate a devaluation. At this stage, Meridor and Netanyahu have decided to focus their efforts on passing the budget. But beginning from next week, Frenkel will be under all the pressure to lower interest rates, even as soon as this month.