The economic crisis in Israel and pessimism in early 2003 gave Minister of Finance Benjamin Netanyahu a good opportunity to launch his economic recovery plan; a plan that was wholly capitalistic.
Two years ago, Netanyahu announced an economic recovery plan, centered on cutting transfer payments, reducing the public sector, streamlining by consolidating ministries' departments, privatizing and reducing the power of monopolistic services, implementing a series of structural reforms, and above all, cutting taxes, in order to raise consumers' disposable income.
The plan talked about consolidating the Ministry of Finance's income tax and VAT departments, radical structural change in Israel's seaports and Israel Electric Corporation (IEC), and reforming the government hospitals system. Netanyahu engaged in a direct confrontation with Histadrut chairman MK Amir Perez (One Nation), and the country's powerful workers committees. Things got so bad, that the Ministry of Finance threatened to initiate legislation to restrict the right to strike by public sector employees.
Israel's economy was in real crisis. Unemployment was soaring, real wages were eroding severely, and in the background, the global economy was in crisis. In the second half of 2003, Israel's economy was in chaos. There were strikes on every side, and monopolistic services such as Israel Ports Authority were shut down. Even Ben Gurion International Airport was closed by a strike near the end of the year.
At the same time, there were ongoing labor sanctions at government ministries, and one essential service or another was closed for a strike every day. There was an impression that Netanyahu, like his predecessors at the Ministry of Finance, was incapable of implementing his economic plan, and would miss a historic opportunity to bring a new economic order to Israel. This was especially true, given the fact that Israel's economy began to improve during the fourth quarter of 2003, mostly thanks to the global economic recovery.
The severe crisis of early 2003, which provided a convenient backdrop for implementing a historic revolution in Israel's economy, has vanished as if it never existed. Given the global economic recovery, it became increasingly harder to demand from various special interests, beginning with the monopolies, the Histadrut, and the powerful workers committees, to agree to painful concessions, and surrender the status quo they had jealously guarded for many years.
Later, it became apparent that Netanyahu had nonetheless, with immense effort, managed to implement at least a small part of the main items of his economic plan. Welfare payments were cut, and the income tax and VAT departments were consolidated. The Ministry of Finance and Israel Ports workers committee recently signed an agreement for structural reform at the ports. Income tax rates have been lowered, albeit insufficiently, still, for the first time, a finance minister stood up to declare his intention of increasing the public's disposable income by cutting taxes, and openly encouraged private consumption. Traditionally, Israel's finance ministers did not see the importance of encouraging private consumption; on the contrary.
On the other hand, important parts of the economic recovery plan have remained only on paper, and are unlikely to be implemented in the foreseeable future. First and foremost, the public sector is going about its business as usual. There has been no real streamlining, and personnel levels continue to stay high. Ministries' departments and government agencies continue their wasteful ways of the good old days.
It's hard to imagine, but Educational Television is still on the air; despite every plan, it has not been shut down. The same is true for the government hospitals system. There were plans to eliminate redundancies in departments at government hospitals, and even close some hospitals down, but almost nothing was done in practice. Israel's income tax rates are still high by every measure, and there is an impression that the process of tax cuts has been stymied, and no real reform in this area has taken place.
Netanyahu started out on the right path of structural reforms in the economy, and emphasized tax cuts in order to increase the public's disposable income, but there is still a long road ahead before his economic plan is fulfilled.
Published by Globes [online], Israel business news - www.globes.co.il - on April 10, 2005