In the 30 years that I have followed the budget process in Israel, I cannot remember anything that even approaches the chaos of this year. This applies to both the professional echelon and the character of the process. The conduct has been so dismal, that irrespective of whether the Ministry of Finance Budget Department is correct in every particular or not, the response of its staff should have been collective resignation.
It is now obvious that the men writing the budget are Histadrut chairman Ofer Eini, Prime Minister Benjamin Netanyahu advisor Ori Yogev, and Labor Party chairman and Minister of Defense Ehud Barak. It would be possible to write an entire feuilleton about this show, but I will leave that work to better writers than me. I will deal with the professional aspects, which of course are not independent of the process.
Israel is in a deep recession whose end is hard to foresee, because it was the result of international, not domestic, developments. This means that domestic economic policy will have very little effect. The policy's primary function is to moderate the effects of the recession. In other words, a sagacious policy could mitigate the recessionary process and make it less severe. Israel will emerge from the recession only when the global economy recovers, which will revive Israeli exports.
Therefore, only two key questions need to be asked. The first is what are the most effective tools for mitigating the recession, and the second is to what extent is it possible to expand the budget deficit in terms of a percentage of GDP?
The answer to the first question is unequivocal. The processes for mitigating the impact on individuals' income are the most effective. The reason is that, of all the alternatives available to policy-makers, shekel for shekel, the reduction individuals' income affects domestic demand the most. This means that it is not a good idea to reduce transfer payments or to raise the prices for public services. It also means that it is a mistake not to pay the recreation allowance to government employees. Naturally, raising taxes is highly undesirable.
As for the second question, how far is it possible to increase the budget deficit? I will begin by saying that I understand the concerns of the Budget Department's staff. Even if a larger deficit causes no immediate danger, there is concern that it will be hard to rein in the budget breaches later on, when circumstances ease. The history of Israeli fiscal policy is not encouraging on this point. But it would have been better to put the issue on the table. The prime minister could have announced that in exchange for a larger deficit now, he will insist that when the deficit will turn into a surplus, the money will be used to reduce the national debt.
It's hard to know what will happen next. Nonetheless, I'll take a chance and say that if Israel's policy-makers were prepared in advance to accept a budget surplus of 7% of GDP, instead of 6%, amounting to an extra NIS 6 billion in spending, things would look different. Let the reader not think that this author is irresponsible; I will quickly note that in 2003, when the public debt amounted to 100% of GDP (compared with 78% in 2008), we already had such a deficit. I do not recall that the heavens fell.
A flawed process leads to a flawed budget. It can only be hoped that Netanyahu will draw the necessary conclusions and fix the flaws.
The author is lecturer at Hebrew University of Jerusalem and a former deputy governor of the Bank of Israel.
Published by Globes [online], Israel business news - www.globes-online.com - on May 12, 2009
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