1. The economic platform presented by Labor party leader Shelly Yachimovich yesterday faithfully reflects her political outlook, but it is liable to lead the Israeli economy to a severe financial crisis and low growth, and to miss its main target. The plan exposes her limitations and weaknesses.
2. In simple terms, Yachimovich proposes increasing government spending by about NIS 139 billion, while state revenues will also grow by NIS 139 billion. There is one small problem: some of the sources of revenue that she proposes are merely fanciful, or endanger the economy. For example, she promises to finance a quarter of her plan (NIS 35 billion!) through "deepening collection and a war on the black market". A little reminder: only a few months ago, Yuval Steinitz's Finance Ministry proposed the same thing, but promised to bring in only NIS 2 billion, a proposal that drew utter ridicule from both the International Monetary Fund and the OECD, and even from the Bank of Israel and the Ministry of Finance itself, which refused to record future revenues under this heading. If Yachimovich implements the whole plan, within a short time the government's deficit will balloon by about four percentage points to 7-8% of GDP, a deficit that the Israeli economy cannot support. Another point, more to do with modesty than economics: Why does Yachimovich think she can raise 17.5 times more than Doron Arbeli, a senior Tax Authority official and one of the toughest people there, promised to bring in?
3. If Yachimovich really wants to expand the public sector to 54% of GDP (which compares with 49% in the EU, which is collapsing under the government burden) she must tell the truth: the State of Israel has to switch to a different tax regime, characterized by a value added tax rate of around 20-22% and the income tax rates of the early 2000s, before Netanyahu's tax reduction program came in. That's a legitimate proposal, but also problematic: at the low point of the business cycle, when fiscal multiples are very strong, such a sharp rise in taxation levels will hit growth hard, and will therefore mean higher unemployment.
4. Even so, Yachimovich can raise state revenues to some extent and carry out part of her plans, without affecting growth, by abolishing exemptions, as some of the business community who identify with her world view have recently proposed: the tax exemption for advanced training funds, for example. This is an absurd, unjust exemption, given to the strongest workers in the economy, that substantially widens inequality. Yachimovich however has no intention of confronting the strong workers committees and their main representative, the Histadrut (General Federation of Labor in Israel), which fight, and will fight tooth and nail, against any attempt to abolish the exemption. It should be made clear once and for all: if the Labor Party reaches a position of power, it will not carry out any measure that is not to the Histadrut's liking, and that includes any reform at Israel Electric Corporation. "A fair and just economy" yes, as long as everything is approved by Histadrut chairman Ofer Eini and his friends.
5. Even if Yachimovich succeeds in raising all the hundreds of billions that she wants, another problem will arise: bitter experience shows that in the State of Israel, most budget additions go to defense. That's how it is in our neighborhood. She therefore had to present a clear stance on the defense budget, the decisive variable in determining civilian expenditure, and the real problem of the Israeli economy. It is obvious that Yachimovich seeks to avoid entering onto this subject. Maybe this is because that would drag her into foreign policy questions that she insists on evading. Without explicit attention to this matter, her program is valueless, and ultimately it is a reprise of the failure of Netanyahu, who strewed money to all comers, and in the end will be compelled to cut the living flesh. There is nothing clever about pointing out the malaises of the Israeli economy; they are clear to every man and woman in the street. Much harder is to show leadership and to determine where money has to be taken from and who has to be confronted.
Published by Globes [online], Israel business news - www.globes-online.com - on December 4, 2012
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