Moody's warns Netanyahu on cost of spending promises

Benjamin Netanyahu's new government will struggle to meet its fiscal targets because of spending promises the Israeli leader made to rope in his coalition partners, the rating agency Moody's said on Thursday, as the new cabinet was due to be sworn in.

The warning was one of the first signs from the business community that the concessions Mr Netanyahu's Likud made to smaller parties, which have already weakened the long-serving prime minister politically, could hurt Israel's economy too.

"The compromises negotiated to form the latest government could lead to a deteriorating, instead of an improvement, in the budget deficit in 2016," Moody's said.

After a bitter campaign in which he poached rival rightwing parties' voters, Mr Netanyahu took nearly two months to form his new government - the maximum allowed under Israeli law and the longest of any in the country's history. The new cabinet will have just 61 seats, or a one-seat majority, in the Knesset.

The unruly atmosphere that surrounded the coalition talks prevailed on Thursday afternoon as Mr Netanyahu parcelled out remaining ministerial and deputy minister jobs to senior members of his Likud, some of whom rejected the posts they were offered.

The Israeli leader was left with a deficit of government jobs after talks that went down to the wire and saw Likud's four coalition partners successfully press him for plum senior posts and spending pledges. The talks were thrown into disarray at the last minute when Avigdor Lieberman, a far-right former ally of Mr Netanyahu, decided to go into opposition.

The scramble for positions among Likud MPs came despite a bill pushed through by the new coalition to expand the size of the cabinet above its current cap of 18 ministers. The measure prompted opposition MPs to accuse Mr Netanyahu of wasting public funds.

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Moody's forecasted that the process of negotiating a budget was likely to be as stormy as forming a government because of the spending promises Likud has made to entice rightwing and Jewish Orthodox parties to join it in government.

Moshe Kahlon, the incoming finance minister, will have 100 days to pass a budget. Moody's warned that the new minister could have difficulty bringing down Israel's fiscal deficit to a targeted 2 per cent of gross domestic product in 2016, from 2.5 per cent this year.

Among the promises Mr Netanyahu's party made to its new partners was to exempt some food products from value added tax and to increase child allowances. Moody's estimated that the total cost of these changes would reach Shk8bn ($2bn), or nearly 1 per cent of GDP.

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