Knesset plenum
Knesset plenumIsrael news photo: Flash 90

After talks that continued into the night, the Israeli government approved early Tuesday morning the state budget for 2013 and 2014.

The proposal was approved by a majority of 21 ministers who voted in favor and one who voted against, Environmental Minister Amir Peretz.

Due to the many changes made ​​to the proposal during the discussions, it was decided to add an across-the-board cut of two percent this year and an additional three percent in 2014 in the budgets of all ministries, except for defense, education and welfare.

It was also decided to cancel a plan to impose VAT on incoming tourists, and to raise the tax on companies by 1.5% instead of 1%.

On Monday afternoon, after lengthy discussions, the security cabinet backed plans for a smaller-than-expected $840 million cut in defense spending.

The decision to reduce the defense budget by 3.0 billion shekels overturned Finance Minister Yair Lapid's demand for a cut of 4.0 billion shekels. Prime Minister Binyamin Netanyahu stressed that a lesser cut was needed because defense funding was "essential to the security of Israel.”

On Monday evening, Shas chairman MK Aryeh Deri, Education Minister Rabbi Shai Piron and Lapid agreed that the planned cuts in Shas’s network of schools will be postponed for the time being.

The three also decided that the issue will be discussed again after the Ministry of Education sets up a state-sponsored education system for hareidim next year.

The budget that was passed Tuesday morning includes measures such as an increase of 1.5 percentage points in personal income tax, one point in corporate tax and a one-point rise in VAT, together with a cut in family allowances.