Doubling deficit sends message of weakness

Adrian Filut

Prof. Omer Moav: Netanyahu lacks the political ability and courage to cut.

"This is a typical act of right-wing governments, and I'm not surprised," Prof. Joseph Zeira of the Department of Economics at the Hebrew University of Jerusalem, and one of Israel's top macroeconomists, told "Globes" in response to Prime Minister Benjamin Netanyahu's decision not to raise taxes in 2013, but to double the deficit target to 3% of GDP instead.

"Obviously this was an extremely irresponsible step, but it's a well-known exercise. Ronald Reagan did it in the 1980s, and George W. Bush did it in the 2000s. Netanyahu is a Republican politician and is a neo-liberal like they were."

Zeira adds, "There's nothing new here. What is behind the move is cutting expenses. But because Netanyahu has insufficient political power, or because he simply does not want to get into this, he's increasing the deficit. He's doing this because he knows he has no political power. After all, when times get worse, it will be easier to make cuts. However, there will be no talk about economic responsibility or stability. There is no connection. The object behind the entire move is to continue the cuts in the welfare, education and social services budgets. It's possible to live with a deficit of 4% of GDP, but it's not good in the long term."

Regardless, Netanyahu's act is being criticized from the Right as well. "This does not reflect Netanyahu's economic views or ideology, but his weakness," Prof. Omer Moav of Hebrew University's Department of Economics, and former adviser to Minister of Finance Yuval Steinitz, told "Globes". "Netanyahu knows that the right thing to do is to cut spending; that's his ideology, but he lacks the political ability and courage to cut. Spending has ballooned because of the government's weakness and capitulation to many demands. Netanyahu is afraid of the public's anger, which will have to finance this spending one way or another. That is why he is postponing dealing with the problem by not raising taxes."

Moav adds, "It is more important to reduce the debt, because debt is a burden. A big debt results in high interest payments, and raises the cost of raising capital. The more the budget is directed to debt payments, the less you have for investment and proper uses. Especially in times of crisis, a balanced budget and a small deficit is necessary. This is done by cutting spending, or if you can't cut, by raising taxes. The idea of increasing the deficit is wrong, because of the long-term consequences."

"There is no need for a further tax hike. Israel's tax burden is high enough," said Clal Insurance Enterprises Holdings Ltd. (TASE: CLIS) CEO Shy Talmon at a Ministry of Finance Accountant General's Office conference. Talmon, a former accountant general, added, The social protest is a debate on priorities. Money doesn’t grow on trees, but everything can be handled. Fiscal discipline is the Finance Ministry's main achievement since the stabilization plan, and the framework must be preserved."

Mizrahi Tefahot Bank (TASE:MZTF) CEO Eli Yones, another former accountant general, contradicted Talmon, saying, "It's possible to raise taxes, but only a little, and on the margins, just to close cash flow gaps." He agreed, however, that the budget framework must be preserved.

Published by Globes [online], Israel business news - - on June 26, 2012

© Copyright of Globes Publisher Itonut (1983) Ltd. 2012

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