David's Harp / One man's deficit
The raison d’etre of Netanyahu's government is etre: The ruckus over fiscal policy is designed mainly to distract from Israel's real problems.
There has been something eerily trivial about the debate raging over fiscal policy. Should next year’s deficit be allowed to float upwards to 3% of gross domestic product, as the cabinet voted at Netanyahu’s behest? Or should it be kept to no more than 2.5% as the treasury mandarins and Bank of Israel Governor Stanley Fischer were insisting?
In Europe – our role model, if a somewhat diminished one these days – most of the continent is expecting deficits in excess of anything Israel is contemplating, as Bibi has gleefully pointed out. France is expecting overspending to reach 4.6% of GDP this year, Britain 5.8% and Spain 5.7%. Okay, Italy plans just a 2.2% deficit, but it is swimming in debt. Germany is minding its books even more carefully, but then Germany is conventionally regarded as being fiscally strict to a fault and risking economic growth.
In the global context it is hard to get exercised one way or the other over the 0.5 percentage point gap.
Yet trivial it is not. Bibi signaled as much when he went around the backs of Fischer and the Finance Ministry and announced his 3% target without telling them in advance, much less consulting with them. Fischer fired back, once at the Caesarea economic conference in June, again at the July 1 cabinet meeting that approved the 3% deficit and a third time last week, when he warned that looser fiscal policy will spell tighter fiscal policy.
In other words, even as the economy slows and inflation is well within the official target, interest rates won’t continue falling.
The iceberg in the room
The debate isn’t trivial, but the terms in which it is being framed are akin to the crew of the Titanic debating how much of delay the iceberg will cause in their arrival time to New York.
The iceberg for Bibi and Fischer is the world economy, whose situation is looking increasingly dire. The 1.5% deficit originally targeted has long been thrown into the dust heap of history, and the 2.5% and 3% ceilings are headed for the same fate. The only question is how much will taxes have to rise and how draconian the cuts will have to be to prevent it from ballooning to those European levels.
The signs are already there. The deficit over the last 12 months to June 30 was 3.7% of GDP. In the first half of this year, as the economy was slowing, overspending has almost doubled to NIS 9.7 billion, compared with NIS 5.3 billion the same time in 2011.
Most of the blame has been placed on tax revenue shortfalls, which are indeed real. But the fact is expenses have been growing quickly as well. They were up 7.5% in the first half of the year, well above the 4.9% projected in the 2012 budget.
Mind you, this is not happening in a recession, or even an imminent recession, as it is in Europe. The Bank of Israel estimates the economy will grow in excess of 3% annually this year and next. Although the data are a little messy after the Central Bureau of Statistics changed the way it measures the jobless rate, unemployment has been generally falling even as more and more people join the work force. Exports are holding up reasonably well given how uncertain the global situation is. Fischer is correct in saying that Israel’s budget deficits are structural, i.e., they are here to stay unless the issue of overspending is tackled through an unpleasant brew of higher taxes and spending cuts. We may yet need to counter-balance an economic slowdown with a wider deficit, but the time hasn’t come.
And, here it is time to take the Titanic metaphor a step further. As the iceberg approaches, there is every worrying sign that our captain doesn’t show much navigational fortitude. Here he is with a 94-strong coalition, riding high in the polls and nearly a year-and-half away from election day and yet he acts like a frightened deer staring into the headlights of an oncoming car. Unless compelled to do so by the High Court, he refuses to confront either the settlers or the Haredim. Until protests exploded last summer, he declined to address the economy’s social disequilibriums. In an earlier stage of his government, he showed no intentions of pursuing an accommodation with the Palestinians until he was pressured by the White House. The raison d’etre of his government is etre.
But there is no one ordering correct budget policy. The White House won’t be calling Bibi to Washington to jawbone him into spending cuts and hundreds of thousands won’t turn out for a Saturday night rally for higher taxes. So Bibi makes policy based on what comes naturally to him, which is keeping his coalition intact and readying for the next elections. As Fischer rightly pointed out, approving a wider deficit at this stage and of this magnitude is not economic policy, it is a political decision. But playing politics is a luxury in the current state of affairs.
Europe’s problems aren’t ours (at least not yet) but neither do we have the luxury Europe had of waiting for a crisis. Unlike Ireland, Greece and Spain, we have no Germany to come to our rescue if things go disastrously wrong. The U.S. did it for us once nearly three decades ago, but times have changed. We are not nearly as self-evidently needy and the U.S. has far fewer resources and much less political will to use them. Like the sinking Titanic a century ago, we will be left to our own very limited devices.