The reception the financial markets accorded Avraham Shochat, in the past two days, as the lead candidate for the job of Minister of Finance, was intended to convey misgivings over the appointment, and especially over a stock exchange tax, a matter with which he is identified. Whether spontaneous or semi-organised, market nervousness is meant to convey anxiety over Shochat’s intended economic policy.
On that head, however, the markets may rest easy. Capital gains will be taxed, with or without Shochat. It was not he but his underlings who invented the 1995 tax, and it is they who are preparing the revised version, as part of the overall capital market and tax system reform. The experienced Shochat, will, on the contrary, make sure first of all to secure Ehud Barak’s approval, and his assurance that he will support the tax throughout. If there is a stock exchange tax, it will be because of Barak, and not because of Shochat.
Let us make no mistake: Shochat was and will be a Minister of Finance acting on the basis of his Prime Minister’s political backing. Not one substantive move will be made in which Barak is not a full partner. Prime Minister's Office director-general Yossi Kucik is a political and personal ally of Shochat's, which ensures that there will be no replay of his sour relationship with Shimon Sheves, director-general under the late Yitzhak Rabin.
From Shochat’s point of view, his letter of appointment contains two clauses: he is to renew growth and rearrange the economic order of priorities, as Barak promised. Here, there is no great difference between the Shochat appointed in 1992 and the one appointed in 1999.
There has been much talk of Shochat’s readiness to support budgetary expansion and a higher deficit as a means of emerging from the slowdown. In light of past experience, however, he does not look like a Minister of Finance who hastens to support the enlargement of deficits. Worth keeping track of, in this context, are remarks spoken and written by some of the people able to influence Shochat, such as David Brodet or Prof. Avi Ben-Bassat. They show no support for fiscal expansion, but rather post a clear and express call for reducing the government’s share in GDP. The only thing that might be expected, if it is down to Shochat, is that next year’s deficit will not be decreased.
Shochat committed one strategic economic policy error. In 1994, when accelerated economic growth seemed set to last, he agreed to move in the direction of fiscal expansion, on the assumption that incremental tax collection could finance the additional spending.
This was the assumption underlying the 1995 budget, where the departure from the restrictive policy line began. What really ought to concern the business sector is Shochat’s relationship with the heads of Bank of Israel. In his previous term in the Ministry of Finance, his relations with Yaakov Frenkel went from bad to worse, and are currently characterised by a great deal of hostility. Shochat remembers not only Frenkel's monetary policy, but also the reception he himself was accorded in October 1995 by the heads of the International Monetary Fund in Washington. They made his life miserable, finding ways to publicise their criticism of him. Also, Frenkel’s short-lived consent to succeed him after the 1996 elections, and Shochat’s subsequent efforts to curtail the Governor’s independence, do not augur well for the relations between the two.
Published by Israel's Business Arena July 5, 1999