Israeli PM Benjamin Netanyahu addresses an election campaign rally in the southern city of Ashdod on January 16, 2013
Israeli Prime Minister Benjamin Netanyahu addresses an election campaign rally in the southern city of Ashdod on January 16, 2013. Israel's economic record, once a point of pride for Netanyahu, has become a potential pitfall ahead of elections, and the next government could now face a major budget crisis. © David Buimovitch - AFP
Israeli PM Benjamin Netanyahu addresses an election campaign rally in the southern city of Ashdod on January 16, 2013
Jean-Luc Renaudie, AFP
Last updated: January 17, 2013

After vote, new Israeli government could face budget crisis

Israel's economic record, once a point of pride for Prime Minister Benjamin Netanyahu, has become a potential pitfall ahead of elections, and the next government could now face a major budget crisis.

The announcement on Sunday that the 2012 deficit had hit 39 billion shekels ($10.4 billion/7.8 billion euros) -- nearly double the government's target, and 4.2 percent of GDP -- was quickly seized upon by Netanyahu's critics.

It came just over a week before the January 22 elections, in which domestic discontent over income disparity and rising prices -- which produced record nationwide demonstrations in summer 2011 -- has been a key campaign issue.

Netanyahu dismissed the figure, saying it was only slightly higher than the government's 3.9 percent prediction, and insisting it would not mean tax hikes.

But the Labour party said the figure was almost twice the 20 billion shekel target, and said it meant the next government would be forced to impose harsh austerity measures.

"Last year Netanyahu brought forward the elections by nine months, saying that he couldn't pass these kind of unpopular measures with his current majority," political commentator Hanan Crystal pointed out on Israeli public radio.

"The government has had the tendency to conceal the scale of the deficit and that has set us on a slippery slope," added Danny Catarivas, director of international relations at the Manufacturers Association of Israel.

For Netanyahu, who has presented Israel as an island of prosperity throughout the global and eurozone crises, the deficit blow is serious.

A large part of his electoral strategy has rested on the good health of the economy, which grew by 3.3 percent in 2012, with unemployment below 7.0 percent and annual inflation of 1.6 percent.

Netanyahu immediately went on the defensive, trying to reassure voters that the figures wouldn't mean more taxes.

"I don't think that this will have consequences for Israeli citizens," he said in comments that roundly failed to convince commentators.

Last summer, Israelis got a taste of what could be ahead of them, with VAT rising to 17 percent and taxes rising by one percent for those earning over 14,000 shekels ($3750, 2,800 euros).

But there is more to come, with Finance Minister Yuval Steinitz calling for budget cuts worth 14 billion shekels ($3.75 billion/2.8 billion euros) and Central Bank Governor Stanley Fischer backing further tax hikes.

One key unknown is the fate of the enormous defence budget, which alone accounts for 17 percent of spending.

During Netanyahu's nearly four years in office, the military budget soared 20 percent to 60 billion shekels ($16 billion/12.1 billion euros), with the military systematically failing to make promised spending cuts.

That has left Netanyahu open to attack, including from former prime minister Ehud Olmert, who is not running for election, who said he had "wasted" 12 billion shekels preparing for an attack on Iran's nuclear programme that never came to pass.

Netanyahu has brushed off the criticism, with the latest polls showing that even the deficit figures have not seriously affected the lead of his rightwing Likud party, which is running on a joint list with the hardline nationalist Yisrael Beitenu.

"This issue of the deficit has without doubt come too late in the campaign to influence the results," Crystal said.

But that hasn't stopped Labour party head Shelly Yachimovich from trying to capitalise on it as she positions her faction as the defender of Israel's frustrated middle class.

"Netanyahu is leading the Israeli economy to total collapse," she warned after the deficit figures were released.

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