"Dear Finance Minister, welcome to the real world. Things are a lot harder here, aren’t they? In the real world, it's not enough to utter slogans and promises, which may or may not be kept. Here, you have to show results, and when there are no results, you are penalized," writes Epsilon Investment House Ltd., following the public outcry against the austerity measures in the 2013-14 budget presented by the Ministry of Finance. The measures include a VAT hike of 1%, an income tax hike of 1.5%, and billions of shekels in spending cuts by government ministries.
"The use of spending cuts as the only weapon for dealing with the deficit is the easy way, but also the most harmful," says Epsilon analyst Idan Azulay. "Two weeks ago, we wrote at length about the change in attitude by several debt-ridden countries to the exclusive use of government spending cuts to cover the deficits while neglecting growth generators. These countries have realized that cuts may be the initial braking to stabilize the economy, but cannot be constant."
Epsilon believes that the Ministry of Finance's measures will ultimately fail. First, because of the blow to private consumption, which will slow the economy. This is because of the tax hikes, which "have a direct and severe effect on people's income."
"The second reason the measures will fail is because the level of services that the average Israeli receives has fallen so much in recent years, leaving people with no choice but to finance these services themselves," says Azulay.
"Were the budget to include structural measures, which could be seen as improving the quality of life and the standard of living in Israel, they might have been able to ease the pain of such a deep (and violent) digging into people's pockets," adds Epsilon. "But this plan only deals with aspects of increasing the state's revenues and reducing spending, without mentioning the treatments needed for some of the ills affecting the Israeli economy.
"On top of this, add the backtracking on almost all of the Trajtenberg Committee recommendations, especially regarding education, and you have the recipe with all the ingredients that ignited the social protest two years ago," concludes Epsilon. "In the absence of any attention to growth drivers, the government is effectively increasing the risk to the economy, rather than reducing it. This is because the factors which have traditionally driven growth still look very fragile."
Published by Globes [online], Israel business news - www.globes-online.com - on May 13, 2013
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