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Military Budget

Every year, the Ministry of Finance and the Ministry of Defense argue over the size and composition of the defense budget, which makes it difficult for the government to reach a decision about the budget. Almost every year, the defense budget that is drafted before the beginning of the financial year is found to be inadequate, and a necessary supplement is granted during the year.

In discussions held by the government and the Knesset about the defense budgets for 2014 and 2015, the traditional wrangling between the Ministry of Defense and the Ministry of Finance went up a notch. The dispute regarding the defense budget reached a new level when in May 2014, the IDF was forced to stop the annual training exercises of reservists due to lack of money.

The political-security cabinet refused to approve the original NIS 56b defense budget. The joint defense budget committee headed by MK Tzachi Hanegbi (Likud) on 15 November 2015 approved the defense budget for 2016 by 8 votes to 4. According to the committee's decision, the 2016 defense budget will be NIS 60 billion [ie, about $15 billion, with 1 Israeli New Sheqel equaling about $0.25 US Dollar]: 56.1 billion, plus a NIS 3 billion supplement, plus NIS 1 billion more for added costs.

Ministry of Finance budget director Amir Levy said that the NIS 3 billion budget supplement would be granted to the Ministry of Defense, provided that the Ministry of Defense implements a number of cost-cutting measures: IDF personnel cuts, increased transparency and control, shorter compulsory service, a higher retirement age for NCOs, hiring civilians for professional jobs, and adding an "exit gate" at age 35 for soldiers in the permanent army, without a bridging pension.

By July 2013 the Joint Knesset Committee on the Defense Budget, chaired by MK Avigdor Liberman (Likud-Beitenu), had approved without reservations the NIS 52.5 billion [about US$14.5 billion] defense budget for 2013. It also approved a NIS 51 billion budget framework, but not the budget plan, for 2014. The reason is simple: without approval of the budget framework, it is impossible to approve the state budget, and that would force new elections. The US Congress approved the full FY2013 Administration request for Israel of $3.1 billion in Foreign Military Financing (FMF), of which Israel is permitted $815.3 million in Off-Shore Procurement. The Act also provided for $479.736 million in joint U.S.-Israeli missile defense programs.

A massive budget deficit in Israel forced its military to slash US$1.9 billion in spending through a series of cuts and a reorganization of its forces. The military on 10 July 2013 unveiled a series of proposed cuts and reorganizations that would lay off 3,000-5,000 career soldiers by 2018, retire old military equipment such as Patton tanks and M109 artillery cannons, and shut several air squadrons and naval units. Army representatives and the Israeli parliaments defense budget committee convened in the Knesset for a major hearing on July 21, prior to the final voting deadline on the national budget on July 31. The Chief of General Staff of the Israeli military, Lieutenant General Benny Gantz, said the armys plan, which also included the construction of a new division at Syrias occupied Golan Heights, would see seven billion shekels (some USD 1.9 billion) cut over the coming five years. Israels 2013 budget, which passed a first vote in the Knesset in May, called for peeling the military budget by three billion shekels (some US$ 820 million), down to 58.4 billion shekels (US$ 16.148 billion).

In May 2013 Prime Minister Benjamin Netanyahu decided to bring before the Security Cabinet and the full Cabinet a decision that moderated the proposed cut to the defense budget by NIS 1 billion [about US$275 million], which will not be at the public's expense. The Cabinet, at its weekly meeting, unanimously approved Prime Minister Benjamin Netanyahu's proposal to moderate the cut to the defense budget by NIS 1 billion without entailing a tax increase. Prime Minister Netanyahu said at the start of the Cabinet meeting this morning that, "We need the IDF to continue becoming more efficient, but we also need additional Iron Dome batteries, and I believe that the path I am proposing today strikes a proper balance between the needs of the economy and security needs." In addition to a reduction of NIS 3 billion [about US$800 million] in the defense budget, it was decided not to revoke the VAT exemption on tourism services, and instead to raise corporate tax by an additional 0.5% (1.5% total).

The budget was already NIS 6.6 billion above the spending target. By August 2013 lengthy discussions between the defense and finance ministries resulted in $832 million in proposed reductions to the defense section of Israels austerity budget while triggering a national debate on whether or how the cutbacks would affect the Jewish states military preparedness at a time when tensions between Jerusalem, Tehran and Damascus showed no sign of abating.

In 2012, the Israeli defense market valued US$13.10 billion, which represented the third largest military expenditure in the Middle East. During the review period, Israeli defense expenditure declined at a CAGR of -0.94% but is expected to record growth at a CAGR of 2.97% during the forecast period. The growth can be partially attributed to the US$15.5 billion of military aid from the US scheduled between 2013 and 2017; moreover, the continued security threats from Iran, Syria, and other neighboring Arab countries is forecast to result in Israel spending US$71.3 billion on defense during the period 2012-2017.

The security threats posed by Iran and Syria, hostility from neighboring countries, and Israel's inadequate troop size as a result of the country's small population, are expected to drive the country's defense expenditure during the forecast period. During the same period, the continued military aid of US$3.1 billion per year from the US will continue to increase the spending power of the country. Between 2013 and 2017, Israel is expected to accelerate its defense procurement plans to prepare for potential confrontations with Iran or Syria.

The burden of maintaining a large, modern national security establishment has always weighed heavily on the vulnerable Israeli economy. The total defense budget for Israeli fiscal year (FY) 1988, including United States assistance of US$1.8 billion, amounted to US$5.59 billion. Its principal components were local spending on equipment, supplies, and construction worth US$2.05 billion, personnel costs equivalent to US$1.25 billion, and purchases abroad of US$1.87 billion.

The defense budgets for FY 1987 and FY 1986 totaled US$5.6 billion and US$4.98 billion, respectively. The budget submission to the Knesset indicated that the objective was to maintain overall local costs--i.e., those items not supported by United States assistance--at the same level in both FY 1987 and FY 1988. Several factors made it difficult to compare the defense effort on a year-to-year basis. For example, defense budgets were affected by the immediate costs and later savings associated with cancellation of the Lavi fighter aircraft project. The additional wages needed for the extended call-up of reservists in 1988 to help contain the uprising in the occupied territories also depleted resources available for normal defense requirements.

As the largest single item in the government budget, defense spending absorbed a major share of the budgetary cuts within the Economic Stabilization Program of July 1985. The cumulative reductions in domestic defense spending from FY 1983 through FY1986 were estimated at US$2.5 billion, representing a 20 percent decrease in total domestically financed military expenditures. The defense burden as a ratio of GNP had averaged about 9 percent until 1966. Real defense expenditures increased dramatically as a result of the June 1967 War and the October 1973 War. They subsequently remained steady at about 10 to 15 percent of GNP, excluding foreign military purchases, and accounted for 20 to 25 percent of GNP when foreign military purchases (almost entirely funded by the United States) were included.

The Israeli government estimated the defense-related foreign exchange burden at US$2.1 billion in FY 1985 and predicted that it would remain at about that level during the foreseeable future. This included self-financed military imports, indirect imports (such as fuel and materials for the defense industry), and debt servicing of defense-related loans. The Ministry of Finance estimated that these expenditures contributed 53 percent of Israel's total deficit in the balance of payments in 1985. According to the ministry, the share of defense expenditures in the national budget, exclusive of debt servicing, was 43 percent in FY 1984, falling to 39 percent in FY 1985 and FY 1986.

According to analysis by the United States Arms Control and Disarmament Agency, in the 1980s Israel ranked among the five or six highest countries in the world in terms of military expenditures as a ratio of GNP. It ranked eighth in terms of military expenditures per capita (US$875 in 1985) and second after Iraq in relative size of the armed forces (47.9 uniformed personnel per 1,000 population). Israel ranked about twenty-fifth in the world, below a number of Arab and communist countries, in terms of military expenditures as a ratio of total central government expenditures, based on 1985 defense budgets.

The economic burden of national security was perhaps most apparent in terms of manpower, a vital resource in an industrialized nation of only about 4.4 million people. The proportion of soldiers to civilians at any given time was eight times higher than the world average and historically had been far higher than in any other country. This impact was magnified during mobilization of the reserves, which has been increasingly frequent since 1973, when the failure to mobilize promptly proved to be a costly mistake. A full mobilization of the nation's nearly 500,000 reserves acted as a sudden brake on virtually all economic activity. Even partial mobilizations, which regularly occurred several times annually, had a profound impact on national production, as did the yearly periods of active duty served by each reservist. Such economic disruption was a principal reason why Israeli strategists emphasized that wars must be of brief duration.

On July 29, 2007 the government adopted, in Decision No. 2119, the main recommendations of the Committee to Examine the Defense Budget ("the Brodet committee"). The Brodet committee's recommendations comprise two main elements: a significant budget increase, subject to efficiency measures enabling the defense establishment to meet the task of strengthening the IDF. Accordingly, the committee recommended a budget increase of NIS 46 billion for the defense system, to be implemented gradually over a decade, together with efficiency measures meant to free up internal resources totaling NIS 30 billion from the baseline budget, gradually over a decade (sections 31-35 of the main recommendations).

In this connection, the committee emphasized, as a guideline for its work, knowing the scope of the budgets required by the defense system over the years and the challenges facing Israel, that "a solution based solely on a budget increase to the exclusion of all other components, will not only fail to solve the problem but exacerbate it and drive other parts of the economy as well as Israeli society into crisis" (page 29 of the report).

The committee also recommended main efficiency aspects to be led by the defense system in its field, including streamlining the manpower department i.e. permanent army personnel, civilian employees of the army and Ministry of Defense personnel; savings in the areas of retirement and pensions; outsourcing and transfer to civilian responsibility, and elimination of redundancies between the IDF and the Ministry of Defense and within the army itself (section 15 of the main recommendations), while emphasizing that the proposed efficiency plan does not exhaust the full potential for efficiency measures (section 1 of the main recommendations).

Even after the adoption of the government decisions on the defense budget and their full implementation in terms of budgetary increases, the defense system adopted decisions and summaries that overrun the budgetary framework established by the government. Consequently, it was decided, in the framework of the economic plan for 2011-2012, to adjust the rate of increase of the defense budget to the rate set in the Brodet committee's main recommendations (with the budgetary amounts granted or earmarked for the defense establishment beyond this framework to be diverted to civilian areas). Furthermore, it was decided that the defense budget baseline should increase only in accordance with the recommendations in the Brodet report, i.e. a deduction of NIS 1.4 billion in 2011 and a deduction of NIS 1.3 billion in 2012.

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