This week, the Knesset and the media have been full of the coalition's move in putting through three bills, the governance bill, the bill for drafting haredim, and the referendum bill, as a package deal. Little attention was paid to the fact that, a few days ago, the Knesset Finance Committee quietly and quickly approved a Ministry of Finance proposal to limit the growth in public spending, as part of a change in the rules for constructing the state budget.
Under the change that was approved, government spending will grow by just 2.6% in 2015 (in comparison with 2014), instead of by 3.8%, which would be the case under existing rules. This means cutting spending by billions of shekels. The official explanation is that this is intended to prevent the debt:GDP ratio, currently 70%, from rising, and to avoid a tax hike. The full explanation is that the government intends to reduce the debt:GDP ratio to 50% within a few years.
On the face of it, the Ministry of Finance's proposal is based on professional and businesslike considerations. In fact, this is a move entirely motivated by ideology, and by quite a few superstitious beliefs. In the end, what Prime Minister Benjamin Netanyahu and Minister of Finance Yair Lapid seek is to reduce civilian spending in Israel even further, particularly on public services. Netanyahu's notion of "the fat public sector" is still alive and well, and his belief in privatization and in policy that benefits those on high incomes is apparently as fervent as ever.
Nevertheless, two professional bodies, the Bank of Israel and the International Monetary Fund (IMF), have both stated that a debt:GDP ratio of 60% is right and appropriate; and Governor of the Bank of Israel Karnit Flug has expressed opposition to a drastic cut in civilian spending, and recommended going in the direction of higher taxes. Israel has the lowest rate of civilian spending among the OECD countries, and its direct taxation, in the form of income tax and companies tax, is also low by international comparison.
The latest IMF report on the Israeli economy finds that, in most years in which there has been a fall in the debt to GDP ratio, the improvement derived from high growth, and not from budget cuts. In essence, putting the country into a situation of "fiscal strangulation" (massive public spending cuts and real harm to citizens) will lead to a slowdown in growth, especially at a time when other demand, from private consumption and exports, is also stuttering. The result will be an unplanned rise in the debt:GDP ratio, and demands from the Ministry of Finance Budgets Division for further "painful measures".
The dispute over the appropriate debt:GDP ratio is only part of a broader issue latent in the government's proposal. In practice, every shekel "liberated" from financing health and education services will be divided between the defense budget and the settlements budget, and the saving will be small. How is it possible to be so certain of that? Because that is exactly what has happened in the past several years, and because that is the real spending rule in Netanyahu's governments.
State's witness
On that matter, it's worth mentioning an article published yesterday in haredi newspaper "Yated Ne'eman", the content of which was later confirmed by MK Moshe Gafni (United Torah Judaism) in an interview with Galei Tzahal (IDF Army Radio). According to the article, in the past few years there has been very large investment, deliberately kept from public view, in settlements and illegal outposts. Gafni is a sort of state's witness in this respect, one who can testify about the deeds of his former political friends, following the break-up of the alliance between them. Gafni, who served in the past as chairman of the Knesset Finance Committee, even described how he acted in the interests of the settlers. He could equally have told of the short committee sessions at which billions of shekels were approved for the defense budget, with no public control and no real discussion.
If anyone believes that things will be run differently in future, and that the proposal in question will indeed bring about a significant reduction in the deficit, they are entitled to live in their naivety. The real fiscal rule, as set in the Netanyahu government, is that the money goes to the strong. The rest have to make do with the prime minister's speeches in English and the minister of finance's postings on Facebook.
Published by Globes [online], Israel business news - www.globes-online.com - on March 11, 2014
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