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

A New Dawn – Israel’s Economy

A New Dawn – Israel’s Economy 01.04.13

by

Howard Adelman

Last night I went to bed just before midnight. This morning, I woke up at 7:00 a.m. It was already light. I slept for seven hours straight. I did not get up once. In university, I used to sleep from 1:00 a.m. until 7:00 a.m., but that was 55 years ago. Now, to sleep more than 4-5 hours during the night is unprecedented for me. It clearly has to do with my sleeping with a breathing mask. I have now gotten used to it and did not pull the mask off or turn the machine off in my sleep last night. I am curious about what this will do to my sleepiness during the day and my nap patterns. You will be probably pleased to know that I will consequently have less time to write. My blogs might even become shorter.

One thing that has not changed is that I go directly from a deep sleep to being wide awake. I’m at my desk working within two minutes of waking. I assume that will not change as it is a product of my different brain wave patterns. Those patterns have, until the last few years, been of great benefit to my productivity. However, they have more recently led to my current problems with sleep apnea with the side effect of high blood pressure which I never had before. Hence, the sleeping mask and supply of oxygen during the night.

Obviously, a number of factors go into having a good night of sleep other than wearing a sleeping mask. I do not drink coffee and generally do not drink alcohol so these have never affected my night of sleep. I also do not usually eat chocolate. However, Nancy made a batch of chocolate cookies for Pesach and I had several right after an early dinner with my four grandchildren who live in Toronto. Evidently the dinner was early enough – 6:00 p.m. – so that eating several chocolate cookies did not affect my sleep. Nancy cooked a terrific meal for the grandchildren. However, they were so rambunctious after dinner that one needs a good night of sleep after they leave. Further, the early dinner may have helped getting a full night of sleep because we usually eat several hours later.

I certainly do feel really refreshed. As usual, when I went to bed and put on the mask, I was asleep literally in seconds. I do not meditate or pray or use other measures to relax when I go to sleep. I lie down and am usually asleep within, at most, a minute. When I wake up, I wash my mouth, but otherwise go straight to work at my desk without eating for I like to have breakfast with Nancy when she gets up. I probably should exercise but I do not. In any case, I feel totally refreshed. I tend to shower later and work first.

I always wake up without an alarm and eager to get to work on whatever is on my mind. However, the most surprising part is to wake up when it is already light. What a delight! I not only do not have to feel my way around in the dark lest I wake up Nancy, but seeing the bright day is exciting in itself. The sky was clear blue and it looked glorious outside. Mornings have always been blissful to me and now they will be accompanied by light, though I think I will miss watching the sunrise.

All this is but a prolegomena to a new series of blogs on the Israeli economy which I will begin tomorrow in preparation for Israel tabling its new budget sometime in June. In part this is recognition that political affairs, in particular, relations with Palestinians both within Israel and in the occupied territories, will be primarily determined by economic interests rather than security issues, although there will clearly be an interaction between the two and both will be shadowed by ideology. Further, most foreigners, particularly Jews in the diaspora, know little about the Israeli economy other than the image of Israel as a start-up nation. Protests, then, over the cost of living in general and cottage cheese in particular, take them by surprise. Third, as in most advanced economies with the rising supremacy of the neo-liberal economic agenda, the disparities between the disadvantaged and those with money has grown. Israel once boasted the least amount of economic inequality, and was second only to Tanzania. The country now ranks among the highest in economic inequality. Fourth, all economies are buffeted by external economic crises, particularly those current in Europe with its series of monetary crises. Israel is very vulnerable, particularly since it has a very large trade with Europe. Finally, as most people are aware, the Israeli economy is in trouble with expenditures greatly exceeding state revenues. The electoral shift in the last election largely took place because voters had lost faith in Likud’s ability to manage the budget.

For background, the State Budget of Israel that sets out planned expenditures and sources of revenue must be tabled no more than 60 days before the beginning of the financial year. If the fiscal year is July to June, by law the budget should be tabled by the end of April. With a new government just recently formed and sworn in, this became an impossible deadline. The first meeting of the cabinet on 18 March 2013, in addition to approving the Security Cabinet immediately after it was sworn which I have already written about, unanimously approved amending this Basic Law for the State Budget to extend the deadline for approving the 2013 budget to 135 days from the date the 33rd government was established. Within 85 days from its swearing in, the government must submit a budget proposal to the Knesset, which will be about mid-June. The Knesset will have 50 days to pass the budget after three readings, or in early August.

I will follow the following rough initial agenda. First, I will review who in the cabinet controls the key economic sectors and what their current policies are. Second, I will take an overview of the current Israeli economy because, as is widely known, the deficit reached 4.2% of GDP instead of the targeted 2% and the new government must both make huge budget cuts as well as raise new revenues to prevent the budget deficit from spiralling out of control. This means spending cuts of at least $14B shekels or over $US3.5B and tax hikes of up to twice that amount again. Such changes can be calamitous especially given that Yesh Atid and its leader, Yair Lapid, now Finance Minister, promised to build large numbers of affordable rental apartments for young people. HaBayit HaYehudi led by Naftali Bennett, the new Economics and Trade Minister, promised to build new apartments and infrastructure for the settlements. Further, Uri Ariel from his party is the Minister of Housing. On the other hand, the growth of the Israeli economy has been a tremendous success story. Israel has moved steadily up the Human Development Index and now ranks among those countries in the very high development group, ranking 16th ahead now of Belgium, Austria, France and Finland.

Bennet also promised to break the concentration of economic power among the economic oligarchs in Israel and to sever the ties between financial corporations and non-financial ones to end the current pattern of cross-ownership. He has been put in charge of the cabinet committee charged with both reducing the cost of living and breaking up the monopoly controls of Israeli economic power. Nochi Danker the Koor Group, Yitzcahk Tshuva from both the Delek Grou and the El-Ad Group, the Ofer family which owns the Mizrachi-Tefahot Bank, Shari Aronson who owns Bank Hapoalim, and the other billionaire oligarchs will all be threatened. For though the Knesset debated a bill presented by former Finance Minister Yuval Steinitz along these lines to come into effect in six years, the bill, though it received preliminary approval did not come to a final vote and Bennett wants it to be toughened. It is not clear to me yet how the budget and these new moves against concentration of corporate power will affect one another, particularly since the tycoons are awash in debt and policies governing large-scale lending may undermine the stability of their enterprises. Yossi Maiman lost control of the Ampal Israel American Group and the Danker Group is rumoured to be at risk. However, we will soon see as this policies to break up the monopoly on corporate power are expected to be passed by the Knesset before the budget is tabled.

Further, now that the religious parties are excluded from the government, part of the savings and additional revenues will eventually come by putting the Haredi sector to work in the productive economy and reducing subsidies for the Yeshiva sector. We will explore the options available in this area and the anticipated economic, social and political implications. After all, the alliance of Yesh Atid and HaBayit HaYehudi has gone beyond a tactical alliance of convenience in negotiating with Netanyahu and has become a strategic alliance to lower the costs of housing and develop the economy. Further, both parties now see the possibility of an historic change and a new dawn first in uniting a hardline Orthodox party and a centrist secular/modern Orthodox party with a common agenda to draft Haredim and end their sweeping exemptions from military service, enhance their secular education and work-participation, and reallocate resources for an a fairer share of rights and responsibilities across all of Israeli society.

On another front, in the energy sector, the Tamar Offshore Gas Fields are expected to come into operation during the forthcoming fiscal period and the even larger Leviathan field about 2-3 years later. They will have a tremendous impact on the revenue side, on the balance of trade and on both business and consumer costs.

There is another area of the budget that will require separate attention, the defense budget amounting to one-sixth the budget. Everyone expects the defense budget to be cut and Ya’alon as Defense Minister supports such cuts. However, he and Lapid will inevitably come to blows as Lapid will push larger and more immediate cuts while Ya’alon would prefer smaller more spread out cuts.

For all sorts of reasons, there are wide expectations of a new dawn in Israeli economic policies. Though perhaps I may no longer be waking up before dawn, I can spend my time examining whether this in fact can be expected to be a new dawn or not.

Israel.Economics.A New Dawn.01.04.13.doc