Minister of Finance Yair Lapid has repeatedly and demonstrably expressed scorn for economists in recent weeks, both in the consequences of his plan to institute 0% VAT on a purchase of a first apartment and his refusal to consider a tax increase and elimination of exemptions in order to reduce the growing budget deficit. He rejects criticism from economists, claiming that his critics understand economics, but not business or purchasing an apartment.
There are two explanations for Lapid's arguments. The first is that he really believes he understands the economy's needs better than Governor of the Bank of Israel Karnit Flug and National Economic Council chairman Prof. Eugene Kandel. The other, and more likely, explanation is that Lapid is not really thinking about what has to be done about Israel's economic problems; he is thinking about what he has to do in order to get to the next elections in a better situation than his current one. Lapid is not the only one; all the other government ministers, including Benjamin Netanyahu, are thinking the same way.
For the members of the government, the image of the 2015 budget is derived from the answer to the question of when the next elections will take place. The way things look now, the working assumption of the ministers and coalition members is that elections may be looming. What results from this assumption is that in order to avoid rocking the boat too much, tax increases and eliminating tax exemptions should not be discussed, because any such measures will harm powerful economic interests.
In this scenario, which is currently motivating the ministers, the right thing to do is to "stop up the holes" when there is no other choice, and stay away from any question liable to hurt them on election day. In this situation, a series of measures are being taken to "stop up the holes" wherever they appear, while maintaining the status quo. This week's cabinet decision to institute another across-the-board spending cut amounting to NIS 1.5 billion is an example of what awaits us in the coming months.
The cut is being made in order to pay for some of the costs of the war in Gaza, and it is clear that it will come primarily from the civilian ministries' budgets, which are very low, compared with what prevails in OECD countries. At the same time, Lapid is proposing to raise the budget deficit to 3.4% of GDP in order to avoid having to discuss a tax increase.
These two decisions are designed to let the people know that where the budget is concerned, the future will be like the past. The army will present its demands for billions of shekels, the prime minister will grant them, and the people will pay for it. Ministers always prefer it when expectations are low to begin with. In a situation like this, there is no point or justification for long-term thinking; what is needed is to make the best of the economic distress.
It is clear that in this case, there is no room for dreaming about ways to reduce exemptions for individuals, and especially for companies. When elections are getting close, it is easier for all the individual lobbyists to block initiatives for eliminating one exemption or another, which will enhance the ministers' motivation for making the best of the crisis, with minimum electoral damage.
At the same time, it must be admitted that this behavior is demonstrably unsuitable as the dimensions of the problems facing the economy become clear. It is obvious to Netanyahu and his men that he cannot face the voters when there is a recession, rising unemployment, and falling private consumption. This not just politics; it is also economics to a considerable extent. As of now, no one knows the dimensions of the emerging budget gaps between revenues and spending. For example, no one knows how much actual tax receipts will deviate from the Ministry of Finance's assumptions for 2015.
It can be assumed that these issues will vanish in the coming months: as has occurred more than once in the past, the prime minister, the finance minister, and their entourages will portray things in a positive light, persuade people in central Israel that business in the south is booming, boast about exports of goods, and especially services, and conceal the real state of the Israeli economy.
Published by Globes [online], Israel business news - www.globes-online.com - on August 27, 2014
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