The macroeconomic figures for the third quarter of 2013 that the Central Bureau of Statistics published last week, which indicate a sharp slowing of economic growth, surprised few people in Israel. From leading CEOs to housewives, almost everyone has felt the grip tightening on their pockets and the reduction in their disposable income each month. The public's impression is not happening in a vacuum. Economics is economics, and is a fundamental part of the numbers, both behind the scenes and on center stage.
The vested interests who continue to claim that the economy is improving are deceiving the public. Except for two items, which do not reflect what is happening in the rest of the economy, the economy is headed in one direction - down.
A major part of the slowdown is correctly attributed to exports. The shekel-dollar exchange rate is falling, the European economy continues to stagnate, global competition is intensifying, and strategic obstacles facing leading exporters, such as Israel Chemicals Ltd. (TASE: ICL) and Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA), are having a major impact on Israeli exports. In a highly concentrated economy, it is enough for two or three changes relevant to the biggest companies to affect the entire economy. That said, exports are not the real story.
Many of those who claimed that the data are temporary and spoke about the growth in private consumption and/or imports, ignore the undercurrents of the Israeli economy and the fact that the data reflect and serve growth of only a few tens of thousands of Israelis. Private consumption in Israel is not expected to continue growing in the short term, and we will soon see the U-turn in the numbers - the winter months will far better reflect the reduction in disposable income of most households compared with the misleading robust economic activity during the summer and the Jewish New Year's holiday season.
In practice, there is no indication at the moment, in either the data or in government policy, of a trend indicating a stimulus in production, consumption, or exports. On the contrary. A broad view shows that the tax burden is only growing and the disposable income needed to drive the economy and restore rapid growth, is falling. If we add to this the projected increase in unemployment in 2014, weakening exports, and security uncertainty, every scenario except for a slowdown is utterly disproved.
In this context, the remarks of Minister of Finance Yair Lapid that a reduction in direct taxes will be considered in view of the billions collected from the trapped profits, are especially interesting. Top Ministry of Finance officials rushed to criticize the remarks, anonymously, out of concern for the Treasury, but not necessary out of concern for the economy. A new OECD report also calls on the Israeli government to keep the current tax policy and not make any changes in it. But this time, the OECD is wrong and its making a short-term analysis of the economy.
Reducing direct taxes and the dividends tax in Israel are necessary and even critical for stimulating growth. A tax will increase households' disposable income for consumption and foreign money for investment, encourage work by high income-earners, and offer additional advantages to renew growth, balance weakening exports, and other factors.
True, such a step would force Ministry of Finance officials to grind their teeth and politicians to work hard to economically, publicly, and politically offset the temporary loss of tax revenues in the state budget, but it seems that there is no other long-term solution on the horizon which will help Israel avoid entering a prolonged slowdown.
The author is the chairman of Baker Tilly Israel
Published by Globes [online], Israel business news - www.globes-online.com - on November 25, 2013
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