"So far, this is not an event with macro-economic consequences, there is no crisis, and we are in a slowdown not because of an external event but because of structural problems," Gal Hershkowitz, who headed the Ministry of Finance Budgets Division from August 2011 to August 2013, told "Globes" today. Hershkowitz, who oversaw four state budgets and two fiscal programs in the billions of shekels, one of which was during the previous IDF operation in Gaza, Operation Pillar of Cloud, explains that we should wait until the current operation is over and only then formulate the required fiscal measures. He says that it is difficult to estimate the direct costs because it is not yet known how long the operation will last and how many reserve soldiers will eventually be called up.
Hershkowitz also recalls that the cost of Operation Pillar of Cloud, which lasted eight days and did not involve a ground operation, was estimated at NIS 800 million, and was financed entirely out of the defense budget. Operation Cast Lead, on the other hand, which lasted three weeks and did include a ground incursion into the Gaza Strip, cost some NIS 3 billion.
Explaining why there is no justification for expanding the budget, Hershkowitz says, "As things appear at present, this is not a macro event, and tax revenues should not suddenly plummet. Even if in the end the costs total NIS 2-3 billion and we take into account a certain fall in revenues, that's still not a crisis. We can and should cope with it, and solutions can be found within the existing budget framework. The problem at the moment is estimated at NIS 1-2 billion. This is a one-time event that is unconnected to the 2015 budget. Even if a supplement is decided upon, it should be one-time, and not an addition to the defense budget base, that is to say, no permanent addition should be given."
According to recent reports, the gap between the Ministry of Finance and the Ministry of Defense on the 2015 budget is immense, and estimated at some NIS 6 billion at least. "This is a very large gap, and the government will have to decide how much to add to defense and what the sources of finance will be, the options being to raise taxes or reduce social-civilian spending. It's a matter of the government's order of priorities."
As far as the macro-economic consequences of Operation Protective Edge are concerned, Hershkowitz returns to his opening point, and emphasizes that the economy is not in crisis. "A large part of the current slowdown in growth stems from demographic changes and internal structural problems of the economy, such as low productivity, an inefficient public sector, and high economic concentration, leading to the low growth rate of 3%. In the end, in the current conditions, the economy is not in crisis, and so it is important to maintain planned budget frameworks with the aim of preserving financial stability.
"It's important to maintain a low structural deficit. One reason for that is to retain the ability to expand the deficit when there is a non-permanent external event. So, for example, Israel went into the global economic crisis of 2008 with a deficit of 0% of GDP, and this enabled it to expand the deficit to 5.2% of GDP. This year we are close to the deficit target, and so there is no need to raise taxes, especially as the sharp adjustments on both the revenue and expenditure sides have already been made," Hershkowitz concludes.
Published by Globes [online], Israel business news - www.globes-online.com - on July 21, 2014
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