Reports of the coalition negotiations indicate that the formation of a new government will cost some NIS 8 billion. It is not clear how this will be funded, but it is clear to everyone that the Israeli economy is the loser in this battle, writes Yetzirot Investment House chief economist Ayelet Nir in her weekly market review.
The economy is the loser because there is no economic logic in raising child allowances for people whose marginal propensity to spend is below 1, and it would have been preferable to distribute this budgetary expenditure to those who really need it, by expanding negative income tax, for example. By the same token, there is no sense in setting a differential VAT rate on basic products, from which the wealthy and those strapped for cash will benefit equally, at best, and it is more likely that the wealthy will actually benefit more.
If welfare is our top priority, Nir writes, it would be better to raise state pensions. In the past decade, great efforts have been made to integrate the haredi and Arab populations into the labor market, and these efforts appear to be bearing fruit. This is the best way of reducing poverty, particularly poverty amongst children. But according to the reports of the coalition negotiations, drafting of haredim into the army will be impaired, which will harm their integration into the workforce, as will the plan to abolish the compulsory core curriculum for schools.
The growth of the economy depends on expanding the workforce and reducing the weight of dependents who do not work, do not pay taxes, and receive welfare payments, as well as on raising productivity. The agreements reached by the coalition parties drive the economy in the opposite direction, Nir writes.
Published by Globes [online], Israel business news - www.globes-online.com - on May 3, 2015
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