Kahlon will have to compromise

Avi Temkin

The new Minister of Finance wants to lower housing prices and introduce more competition into the banking system.

It is difficult to know what Moshe Kahlon was thinking a minute before his Tuesday meeting with Prime Minister Benjamin Netanyahu, but it is obvious what he was thinking a minute after it ended. Kahlon, will be Israel's next Minister of Finance, and it is time for him to fulfill the promises he made to the electorate in recent months.

It's housing, stupid

Kahlon is coming to the Ministry of Finance first and foremost to lower housing prices. He has to do it fairly quickly, get the credit for it, and do it in a way that does not cause too much damage to the banks, those who have already taken a mortgage, and those who have invested their savings in an apartment for investment purposes. In order to accomplish all that, the new minister wants to carry out a comprehensive reform in the Israeli land market. That is his plan, and he has not concealed it from anyone.

Worthy of note in this context is that the announcement that Kahlon would be Minister of Finance was not accompanied by an announcement that Israel Land Authority (ILA) would be shifted to the Ministry of Finance or any of the new minister from his party. Furthermore, Kahlon was demanding that he be given responsibility for every entity relating to planning and regulation. The question is what Netanyahu told Kahlon about the planning authorities under the Ministry of the Interior's responsibility, i.e. Aryeh Deri's responsibility. It is obvious that Kahlon will have to compromise on some of these issues; the question is how much, and when.

Kahlon, meet Flug

It is easy to guess that the minister-designate will very soon meet with Governor of the Bank of Israel Karnit Flug. If the new minister imagined that his talk with Flug would be confined to enhancing competition in the banking system, he now realizes how important the monetary issues are. If a report by a foreign bank on monetary policy can cause a real commotion in the capital and foreign currency markets, this should teach the minister-to-be that he at least has to understand what is going on.

Anyone asked about the HSBC report will now say that he knew all along that quantitative easing is not a real possibility, but the issue is still there. The Governor has enough common sense to know that she must consult the Minister of Finance about such a momentous matter, even if she eventually makes the decision by herself.

If the economy continues to show signs of faster growth, and if inflationary expectations continue to climb, the question of quantitative easing will not be raised. If these events do not occur, Flug will have to reassess the matter, but it is not on her immediate agenda.

The question of competition in the banking sector is more complicated. The Bank of Israel has never concealed its wish to see more banks operating in Israel, and the Supervisor of Banks has used pushed for greater competition through various means, from a "banking identity card" to help consumer move easily from one bank to another to the entry of a "social bank." The Bank of Israel, however, will explain to Kahlon that the stability of the banks must be maintained above all, because if that is damaged, the damage to the entire economy, not just households, could be enormous.

Kahlon will eventually have to compromise here, too, perhaps in the direction of reforms that will improve the non-banking credit market, especially where access of small and medium-sized businesses to credit is concerned.

2015 is lost; let's talk about the 2016 budget

One piece of good news awaits Kahlon: in the absence of an approved 2015 budget, government spending has not increased, while tax revenues continue to flow. In other words, there is money in the budget that can be used for concessions to the middle class that everyone swears by. This can be done in next year's budget, because only a few months will be left in this year. The Knesset will pass a 2015 budget, because it is a legal requirement, but the minister will pay attention mostly to the 2016 budget.

The problem is that he is not the only one who knows about the new reserves he has at his disposal. The Ministry of Defense is also doing its calculations, and the other parties also want a piece of the pie. Kahlon will have to reach understandings with his partners as soon as possible, and hope that he will be left with something when he is finished. In order to do that, he needs support from Netanyahu, but it is by no means sure that he will get it, judging by the preceding Minister of Finance's experience.

Published by Globes [online], Israel business news - www.globes-online.com - on March 25, 2015

© Copyright of Globes Publisher Itonut (1983) Ltd. 2015

Twitter Facebook Linkedin RSS Newsletters גלובס Israel Business Conference 2018