The Budget Challenge for Israel.02.04.13

The Budget Challenge for Israel 02.04.13

by

Howard Adelman

Yair Laipid as Finance Minister has stated his priorities on his Facebook page:

1. Reduce the cost of living by every means at its disposal (part of the coalition agreement);

2. Enhance free market competition and reduce the concentration of power;

3. Reduce economic disparities and launch a fight against poverty.

Yesh Atid controls four other ministries that have a significant impact on the economy: the Education Ministry headed by Rabbi Shay Piron; the Health Ministry headed by Yael German; the Social Affairs Ministry headed by Meir Cohen; and the Science Ministry headed by Jacob Perry. Further, except on the issue of whether housing needs to be expanded in the settlements on the West Bank or within the State of Israel, Lapid and Naftali Bennett share the same perspective on the economy. Bennett is Minister of Economy and Trade and his party controls the Housing Ministry. So Lapid has the political resources to get a radical economic package through the Knesset. There have been a lot of rumours that Netanyahu gave Lapid the economic ministry to allow him to fall flat on his face and destroy both himself and Yesh Atid as a political force. But the result would be that Netanyahu will also go down with the ship. They not only have an agreement to work together but common interests.

However, Netanyahu comes from the George W. Bush fiscal school for whom it is anathema to raise taxes. On the other hand, Netanyahu oversaw tax increases that came into effect in January. Lapid in the election campaign railed against those tax increases in his famous line: “The Israeli middle class has turned into [Prime Minister Binyamin] Netanyahu’s ATM.” However, as I will later show, Israeli direct income taxes and indirect value added taxes now offer few incentives for any increase. More importantly, there are more than sufficient revenues available by simply closing what in North America are called loopholes and in Israel are called incentives. I will deal with sources for increased revenue in the blog on the day after tomorrow.

If Lapid tries to cut out incentives, he will be subject to immense pressures from outside. If he tries to cut from ministries, he will face opposition from within, and the most formidable will be the Department of Defense. One is wary of trusting his toughness given how poorly he did in the bargaining over ministries but mostly over other positions in the government. But so far he is talking tough. And saying No is relatively easier than getting someone else to say Yes.

The greatest challenge Lapid faces will not be those who pressure him both from within and outside government but from those who are indifferent to the size of the deficit and, in any case, cynical about the possibility of structural changes. After all, in a budget of NIS 350 billion largely locked into a third for interest payments on debt, another third for salaries and the other third with little room for flexibility, how can any finance minister come up with NIS 15 billion in cuts and additional revenues of about NIS 30 billion?

Part of the answer lies in the power of the Finance Ministry as every Canadian knows who watched Paul Martin in the Chretien Canadian Liberal government and Jim Flaherty in the Tory Harper government work their budgets to ensure Canada was not dragged down in the whirlpool of gross indebtedness. The Finance Minister is not just a traffic cop who turns lights red for ceasing expenditures and green for resuming them. First of all, he has a powerful influence on the amount of traffic. Secondly, the Finance Ministry is not just a set of stop lights but a detailed manager of the economy with veto power over every expenditure as well as responsibility for setting the overall budget for each ministry.

I will try to answer the question of how I think Lapid will approach the problem by future blogs under the following planned headings:

1. Israeli Economics – A New Dawn (yesterday)

2. The Budget Challenge for Israel (today)

3. Current State of the Israeli Economy (tomorrow)

INCREASING INCOME AND PRODUCTIVITY

4. Tamar and Leviathan

5. Tax Loopholes and Privatization

6. Monopolies and the Tycoons

7. Technology

CHANGING PATTERNS OF EXPENDITURES

8. Housing

9. Military

10. Disparities – Haredi and Arab Israelis

11. Education

12. Health

I will try to wrap the whole discussion up by evaluating whether such changes will make Israeli a fairer and more equitable society while, at the same time, increasing both opportunities and incentives. Will it be more humane as well as more competitive or will one objective be at the expense of the other? Everyone might expect me to write on these questions, but on the economy? In undertaking these series of blogs, I will have the benefit of world class economists both in Israel and abroad who have contemplated these issues, written on them and undoubtedly some of them will have influenced both Lapid and Bennett in their political platforms.

These experts include: Professor Avi Ben-Passat, a former Director-General of the Finance Ministry (1999-2001), a Senior Fellow at the Israel Democracy Institute (IDI) and a Professor at Hebrew University; his colleague and collaborator, Momi Dahan, at the same institute, Head of the Federmann School of Public Policy & Government at Hebrew University and an expert on macroeconomics and finance as well as economic inequality; Mordechai Kremnitzer who is a Professor Emeritus from Hebrew University, a former Dean of the Law Faculty and currently ice-President of Research at IDI where he heads the Constitutional Principles, National Security and Democracy as well as the Arab-Jewish Relations projects.

Below I have provided a selection of some of the economists whom I will cite with respect to the various topics I plan to cover. I list them to ask you to submit other experts whom I should read in preparing my blogs.

Energy Resources: Tamar and Leviathan (04.04.13)

Philip Hemmings, OECD

Dr. Michael Gardosh, Geophysical Institute of Israel,

Dr. Yehezkel Druckman

Tax Loopholes and Privatization (07.04.13)

Fudim Shrem Kelner, Professor of Finance, IDC, Israel

Daniel Czamanski Technion

Monopolies and the Tycoons (08.04.13)

Oded Sarig, Treasury Commissioner for Capital Markets

Arik Peretz

Yoav Bar-On

Fudim Shrem

Daniel Tsiddon Staggering and Synchronization in Price-Setting

Technology (09.04.13)

Daniel Tsiddon Leapfrogging

Manuel Trajtenberg – Product Innovation and Patents

David Shamah

Shlomo Gradman, Chairman of the Israeli High Tech CEO Forum

Housing (10.04.13)

Manuel Trajtenberg

Daniel Tsiddon

Hosny Zoabi

Z. Eckstein

Yosef Mealam

Military (14.04.13)

Shmuel Even

Yaakov Lefshitz

Disparities – Haredi and Arab Israelis (15.04.13)

Eran Yashiv

Daniel Tsiddon

Manuel Trajtenberg

Health (17.04.13)

Neil Gandal

Tomorrow I will discuss the Current State of the Israeli Economy to show why new sources of revenue must be found as well as cuts made on the expenditure side to meet a target, not of a balanced budget – there are no Tea Partiers in power in Israel – but of a deficit of 3% of the gross national product. The deficit ran at over 4% during 2012 and perhaps even exceeded that amount in the first quarter of 2013.

The Budget Challenge for Israel.02.04.13.doc

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