US embassy cable - 05TELAVIV1896

C O N F I D E N T I A L SECTION 01 OF 02 TEL AVIV 001896 
 
SIPDIS 
 
E.O. 12958: DECL: 03/27/2015 
TAGS: ECON, IS, ECONOMY AND FINANCE, GOI INTERNAL 
SUBJECT: SHINUI DECISION VIRTUALLY ASSURES PASSAGE OF 2005 
BUDGET -- FOR A PRICE 
 
Classified By: ECONOMIC COUNSELOR WILLIAM WEINSTEIN FOR REASONS 1.4 (B, 
D) 
 
 1. (C) Summary.  Prime Minister Sharon appears to have 
finally secured passage of the 2005 budget.  On Saturday 
March 26, PM Sharon and Shinui Knesset members Yosef (Tommy) 
Lapid and Avraham Poraz reached agreement that Shinui would 
support the second and third readings of the 2005 budget in 
the Knesset the week of March 28.  In exchange, Sharon 
pledged NIS 700 million for key Shinui budgetary priorities 
including support for universities, science, culture, 
environmental causes, and citizen-soldier reservists.  The 
press reports that this is part of a package of around NIS 
1.6 billion that will be paid to political parties to garner 
their support of the budget. 
 
2. (C) The view from the economic side has been positive: as 
one Bank of Israel official told us, the most important 
objective was to pass the budget.  A contact in the Finance 
Ministry's Budget Department said the Shinui deal would not 
bust the budget, although it was likely to require another 
round of across-the-board cuts in ministerial budgets.  The 
deal's real significance, of course, lies in the fact that 
Sharon and his disengagement plan have just dodged the bullet 
of new elections.  End Summary. 
 
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Follow the Money 
---------------- 
 
3. (U) According to press reports over the past month, the 
GOI has doled out a significant amount of money to secure 
budget passage.  In addition to the money now committed to 
Shinui, the GOI has promised the following amounts for other 
budgetary priorities: 
 
--  United Torah Judaism won NIS 290 million as the price for 
joining the coalition.  The funds will be used for increasing 
the budget of Orthodox Jewish religious institutions. 
Ironically, it was the provision of these funds that led 
Shinui to quit the government at the time of the first budget 
reading in November 2004. 
 
-- Labor won NIS 700 million as the price for the Labor 
Party,s agreement to join the Coalition.  These funds will 
pay for the cancellation of cuts in allowances to the 
elderly, increased support for Negev and Galilee development, 
as well as increased support for health care. 
 
-- On March 24th the GOI agreed to re-allocate an additional 
NIS 150 million for health services. 
 
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Lapid Changes Course and Suffers Accordingly 
-------------------------------------------- 
 
4.  (C) Shinui's Lapid has come under withering criticism for 
his changing stance on the budget.  There have also been no 
shortage of news stories regarding internal strife within the 
Shinui party itself.  Lapid has not responded well to the 
pressure, issuing conflicting statements about the reasons 
for his changing views.  On March 15, for instance, he told 
Israel Radio that officials in Washington were pressuring his 
party to support the budget. 
 
5. (C) In view of his 180-degree course change over the last 
weekend, Lapid was careful to cover his flank with members of 
the party.  According to Shinui MK Ilan Leibowitch, Lapid 
called all Shinui MKs Saturday morning to discuss the 
potential deal with them.  Leibowitch says he told Lapid "You 
can take the money and vote for it, or pass on the money and 
abstain, but don't vote against the budget." 
 
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Others also not too happy with Lapid 
------------------------------------ 
 
6. (C) The PM's deal with Shinui has caused consternation 
amongst those whose own budgetary and political priorities 
may suffer as a result.  Shas rejected all proposed attempts 
to find alternatives to cuts in child allowances that they 
claimed would enable the party to support the budget.  MK Eli 
Yishai, head of Shas, rejected all proposals, and adhered 
continuously to the position that the budget did not provide 
solutions to the problems of poverty and distress in weaker 
sectors of the economy.  Shas MK Meshulam Nahari told 
political officer that he was very angry about the Sharon - 
Lapid deal, charging that the deal would come at the cost of 
suffering children and people who can't afford medications. 
Nahari very matter-of-factly noted that, as a result of the 
deal, "the government won't fall, the budget will pass," but 
added that Shas would "find other opportunities to bring down 
the government." 
 
7.  (C) Some claimed that Lapid had made a long-term tactical 
error in making the deal.  Labor MK Michael Melchior, for 
instance, told political officer that Lapid had "become the 
laughing stock of the country" for repeatedly promising to 
vote against the budget, only to drop his objections in the 
end. 
 
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The Economists' View: Budget Passage Worth the Compromises 
--------------------------------------------- ------------- 
 
8.  (C) On the economic side, most observers thought the deal 
made sense and were not overly concerned about the cost to 
the overall budget.  Finance Ministry Deputy Budget Director 
Yossi Gordon said that the GOI would maintain the budgetary 
framework, in spite of the new obligations to Shunui: "We'll 
just go back to the Ministries with another 3% 
across-the-board cut..."  The Bank of Israel's Research 
Director, Karnit Flug, said that she is neither surprised 
that Shinui ended up deciding to support the budget nor 
surprised that it obtained quite a bit for its yea vote.  She 
also said she was confident the GOI could find a way to pay 
for the Shinui deal without breaking the budget. 
 
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Comment: It's the Disengagement, Stupid 
--------------------------------------- 
 
9.  (C) When all is said and done, however, the real 
significance of the Lapid-Sharon deal is not economic. 
Passage of the budget means that Sharon can pursue 
disengagement unemcumbered by fears of new elections. 
 
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