Appearing before the Knesset Finance Committee a week ago, Governor of the Bank of Israel Dr. Karnit Flug spoke again about the economy's near-term prospects - growth of 3%, productivity that is not growing fast enough, rising pressure on traditional industries and their workers due to the strengthening shekel, and more. Dr. Flug also mentioned the fact that the government will need to find resources in order to avoid exceeding its debt target.
We should remember Flug's comments well in the coming weeks and months when, because of his diplomatic difficulties, we will be hearing more and more from Prime Minister Benjamin Netanyahu about economic accomplishments. Flug had nothing new to say about the “working poor” phenomenon, or boosting productivity. As far as she is concerned, the government has already announced how it intends to meet its targets - by drastic spending cuts, particularly in civilian expenditure.
Because government statements about budget cuts refer to the budget for 2015, there has been almost no public debate on the topic. But the budget will start to be drafted shortly, and around May of this year, Netanyahu and Lapid will need to explain what their plans are, and specifically what they propose cutting. It is safe to assume that the public outcry that will rise in response to proposals to cut social and physical infrastructures will also bring about a wave of protests, especially if the government continues to oppose raising income tax.
In addition to the political ramifications that the 2015 budget will have, we also must emphasize the impact that the proposed cuts in infrastructure will have on Israeli society and the Israeli economy. A cut in social services alongside the anticipated blow to workers' income in traditional industries will lead to a steep rise in the number of working poor. Those who complain today about low productivity in industry, particularly among low-paid workers, must remember that, over recent years, the Ministry of Finance has systematically destroyed the system of professional training for the unemployed. A similar fate awaits other parts of Israel’s social infrastructure, whether in education, health, or welfare.
Looking at the long-term, what Netanyahu and Lapid are planning is not substantially different from policies that have been implemented up to now. The cumulative result of Israel’s social and economic policies is a labor market that creates a class of working poor, and tremendous inequality that ruins any incentive to increase productivity. Why should a worker be interested in working harder if the fruits of his or her labor will only be enjoyed by the factory or company owner?
Decimating social welfare infrastructures
The planned measures are nonetheless different in their magnitude: in the large scope of the cuts, and in the broad segment of population that is liable to be impacted. Moreover, until three years ago, when GDP per capita was rising by about 3% annually, it was possible to use new resources to paper over some of the effects of government policy. But when GDP per capita growth barely reaches 1%, there is almost no wiggle room, and every cut leads to a reduction in actual expenditure, on top of the slowdown in growth. The result is much more devastating for social and welfare infrastructures.
That said, there is a chance that, in the end, the fear of the political ramifications of such measures will deter government ministers, most of all the prime minister. The situation will depend on the positions of Prime Minister Benjamin Netanyahu and Minister of Finance Yair Lapid in the coming months. If Netanyahu’s status is “sensitive,” he will be forced to choose between raising taxes and continuing the policy of budget cuts, privatization of social services, and contraction of government responsibility. Experience shows that Netanyahu has only been willing to stray from his economic credo for short periods of time, and for tactical gain.
The results of his strategy can be seen in the OECD reports on Israel’s social policy, in the number of working poor, and in the depressing statistics on the Israeli job market.
Published by Globes [online], Israel business news - www.globes-online.com - on January 16, 2014