Dam - Bloomberg - August 2011
Halting the flow will be a tall order. Photo by Bloomberg
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No question about it, the establishment of the Trajtenberg Committee is another embarrassment for the Finance Ministry. The people at the treasury are skulking about, bruised and shattered, unable to understand how they fell so far. The fact that the panel for socioeconomic change is headed by an outsider, not the director general of the ministry or its budgets director, proves how weak the ministry and Finance Minister Yuval Steinitz have become.

This is bad not only image-wise, but substantively too. The classic role of the treasury is to build budgets based on its constant monitoring of economic conditions and limitations on tax revenue. An outsider surrounded by outside experts might not realize just where the limits really are and could cause real harm. Just look at the report David Brodet's team penned on the defense establishment, recommending that it get tens of billions of extra shekels. From where? Not its problem.

Populism gone mad

MK Miri Regev stood out even as the wave of populism washed over us. It's easy for her. She doesn't see budget constraints: She would give everybody everything they wanted, taking nothing from anyone.

Now Regev is opposing the increase in electricity tariffs. Why should the price of electricity be related to its production cost, anyway? What does it matter that the supply of natural gas from Egypt has halted, forcing the Israel Electric Corporation to use costlier diesel? As far as Regev is concerned, no prices should rise at all, not anywhere. And if the IEC goes bankrupt? Not her problem.

Histadrut chairman Ofer Eini also opposes the increase in electricity prices and accuses the government of insensitivity. Industrialist leader Shraga Brosh clucks that the hike will raise production costs throughout the industry, and prices across the board. (Though, why does he think the IEC shouldn't obey the basic law of business that every other company obeys? When the price of their inputs rises, so does the price they slap on their products. ) The protesters in the tents complain that the electricity hike is "a knife in the people's heart, more proof of government wickedness." Well, words are cheap.

The ministers aren't taking any prisoners either. Shalom Simhon - minister of industry, trade and labor - suggests halving VAT on basic food products, drugs for the elderly and daycare to 8%. Opposition leader Tzipi Livni and National Infrastructure Minister Uzi Landau propose canceling VAT on water. Orit Noked urges lowering VAT on agricultural produce (good thing she's agriculture minister ). Others suggest cutting VAT on textbooks and electricity. Public Security Minister Yitzhak Aharonovitch - having never heard of Greece, Spain or Italy - proposes increasing the budget deficit by 1%. Social Affairs Minister Moshe Kahlon thinks the government shouldn't repay debt and should instead spend its money internally. God help us if Kahlon is made finance minister.

Like in Arabia

These irrational proposals arose after the latest capitulations by Prime Minister Benjamin Netanyahu and Steinitz, who have abandoned the laws of economics.

When the Arab Spring began, with revolutions sweeping across Tunisia, Egypt and Syria, I thought Israel was different. There, when there are riots, the government throws a few pennies at them, raises salaries for public servants and police, lowers the price of gasoline an increases subsidies for staples such as bread. Then the government runs up huge deficits and economic crisis ensues, accompanied by unemployment and hardship.

I thought we were different. I thought that here, they wouldn't whip out non-solutions, heedless of cost, just to please the masses. But the Netanyahu government has proven it fits in well in the Middle East. The moment the protests began, his government began tossing out goodies without thinking of cost for a second, or about how to pay. That's just what the Arab nations did, and it's exactly what Europe and the United States didn't do.

It began with lowering the price of gasoline in January, and went on to "affordable housing" plans, which will cost billions. How many units? Nobody's counted. Then the students got a 50% discount on public transportation, and the seniors got a grant for heating in the winter. Parents got a 50% discount on baby carriages in buses, and now the government is hiking pay for policemen. It also recently gave the evacuees from Gush Katif another NIS 300 million, on top of the NIS 7.4 billion they'd squeezed out of the state. And the defense budget got an extra NIS 5 billion beyond what was allocated.

But who will pay for all this? It's easy to give, but it's hard to find ways to pay.

1. Cut the defense budget: Netanyahu says that'll be difficult, given the mounting threats around us. The army has already spent NIS 5 billion more than its budget this year and is demanding a lot more next year to buy Iron Dome systems (see Page 12 for more on Iron Dome ) and to prepare for future cyber-war. But the army has plenty of flab that could easily be cut.

2. Cutting quotas on food imports: Israel charges prohibitive customs taxes on imported foods, giving the local producers tons of room to jack up prices. The import tax on beef is 190%; on potatoes it's 230%; on cucumbers, 170%; on milk and cream, 212%; and so on. If these taxes were lowered, local prices would have to drop.

3. Reform tax policy: In our current condition, we mustn't continue to lower direct taxation (income tax and corporate tax ) as Netanyahu plans. Exporters pay just 6% to 12% corporate tax. They must be made to pay more.

Also, abolish the special National Insurance Institute tax bracket for high earners who make NIS 40,000 to NIS 63,000 a month. It's simply made them dodge taxes by opening companies, with the result that the highest earners pay the least in taxes.

Once upon a time, it was the treasury's budgets department that would stand in the breach, restraining efforts to heap manna on the masses. Now we have Manuel Trajtenberg. He will have to jam his finger into the hole in the dam. The good news is he already told Netanyahu that maintaining the budget framework is crucial. But words are cheap.