The Israeli public has over the past two years expressed the strong desire for economic change. The demands range from addressing the increasing cost of housing, a different distribution of the tax burden, regulation and supervision of excessive concentration in the economy and the control exercised by the tycoons, a solution to the distress of young households in the education and housing, a reduction in the price of goods and services, and more. Clearly, the electoral success of the party Yesh Atid was based on this public sentiment.
Can Finance Minister Yair Lapid fulfill these aspirations and institute substantial change? Can he change the priorities as he suggested during his election campaign and in his comments since then? In the past month Lapid appears to have shown that in practice his room to maneuver is very narrow. He is inheriting a budget in deficit in a world terrified by large public debt and amid worrying crises abroad, particularly in Europe. Lapid has already experienced what his predecessors faced: great rigidity regarding the composition of the budget, with significant chunks of defense spending and outlays for public sector salaries being difficult to lay a hand on, and interest groups that are opposed to change.
Lapid has thus turned to a familiar solution: cutting expenditures wherever possible, hiking taxes wherever possible, and attempting to increase the legally mandated budget deficit target. At the moment it doesn’t appear that the current budget will be significantly different from the budgets presented by previous finance ministers.
There is a connection between the public’s desire for change and the morass in budget policy. When over a long period of time the budget is subordinated to goals that aren’t viewed favorably by the public, a feeling is generated among the public that the government doesn’t serve its interests. Part of this attitude stems a sense that the government serves mainly the interests of specific groups, which is what led to the social justice protests in the summer of 2011. As long as the room to maneuver on budget policy is constricted, which is the situation existing today, no real change will take place.
The new budget already ties the treasury’s hands until the end of 2014. If Lapid wants to influence and change things, he will need to get out of the tight spot he has been given today. He can do this if he succeeds in changing the process of drawing up the budget. The right changes to this process would allow him to implement a fiscal revolution that would fulfill the public’s demand for change and leave its mark for many years. In fact, a time of budget cuts is actually a good time to change the budget-building process − because of both the public mood and the struggles of various political parties against the government bureaucracy, which together could enable the change.
Thus I propose changing the budget decision-making process in three ways. The first is the establishment by law of a fiscal council. It would comprise experts, similar to the monetary committee at the Bank of Israel, and formulate alternative budget strategies. The council would have the necessary knowledge and professional authority, and therefore necessary power to propose changes in the mix of expenditures and taxes. For example, it could propose a reduction in income subsidies for those who don’t work while instituting a higher negative income tax for those who do. The council would also be able to set a higher tax rate for companies that today pay close to zero tax, while taking into account the possibility these companies might leave the country.
The second change would be the introduction of a multi-year outline for spending in all key areas: education, health, infrastructure and social services, like what was done by the Brodet Committee several years ago for the defense budget. These kinds of outlines can enable a gradual and intelligent change in priorities. If we want to transfer budget funds from one sector to another, this is the way to do it.
The third change would be the creation of a unit in the treasury staffed by professional economists for the implementation of the first two components of this reform plan. Today there is a substantial lack of information regarding what is actually being done in the drawing up of the budget (for example, a proper mapping of the tax system) and what new methods would be useful.
These proposed changes aren’t technical ones. They constitute a practical path toward fiscal reform. When the people headed into the streets to protest or when more than half a million people voted for Yesh Atid, their minds weren’t focused on the question of how to change things in this country; they were only thinking about results. Yet when we look at the economic decision-making process from up close, talk is cheap but change is hard.
The time has come to actually enable the changes the public longs for. To do this, the mechanisms needed to effect these changes must be built.
The writer is a professor at the School of Economics and chair of the Department of Public Policy at Tel Aviv University.
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