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Bank of Israel surprised some market pundits this week when it announced the sharp 0.5 percentage point cut in monetary interest, in contrast to estimates that after a series of such sharp reductions, Bank of Israel Governor David Klein would start to slow the pace.

Klein's decision to reduce key lending to 6.5 percent will certainly be applauded by the Finance Ministry, a source of loud cries for rapid interest rate reduction over the past two months - interest rates treasury voices say are strangling the economy and preventing it from achieving its growth potential.

But interest rate cuts are inherently risky for treasury officials, the finance minister and essentially for the entire government. As interest rates are dropping, spotlights will remain trained on what is truly important - fiscal policy, public sector spending, structural reforms and the assorted remaining things that are far harder to budge than interest rates.

But if the spotlight moves off Klein for a moment and swings around to Netanyahu, it will light up the following little vignettes:

l It hasn't even been a week since the U.S. approved $9 billion in financial aid, and the treasury is already thinking out loud about violating a Bush administration precondition to the loan guarantees that next year's deficit not exceed 3 percent. Senior treasury officials mention off the record raising the deficit to 4 percent and chant the old mantra "what is really important is the trend direction and the long-term target." For how long can they sell that old story? We've been selling it to ourselves and to both local and foreign investors for upwards of nine years; the day will come when it loses credibility, when we don't even believe it ourselves.

l Just three months ago, the finance minister dismissed with a wave of the hand an "alternative" economic plan introduced by Histadrut labor federation chair Amir Peretz, which included raising taxes, explaining to Peretz that taxes are ruining Israel. Netanyahu told us that his entire economic doctrine is based on reducing taxes and the only question is at what pace. Now treasury division chiefs are talking about all kinds of taxes - on consumption, on inheritance, on capital gains - and soon we may even hear of tax on labor.

l Just six months ago, the finance minister warned that deficits are like inflation, that at some point they hit the 5-6 percent range and then they begin to spiral upward. We were impressed with Netanyahu's understanding of economics and the behavior of mathematical functions, but now we have trouble understanding how he can be at peace with the 6 percent deficit expected this year and the 4 percent deficit target considered for 2004.

l Just seven months ago Netanyahu spoke of the overweight public sector's need to go on a diet comprised mostly of wage and spending cuts. Just seven months ago we talked about a 20 percent cut in wages to the highest salary-earners in the public sector. After four months, the treasury decided half that cut would be enough and now, when it becomes unsurprisingly clear that the budget is still amazingly inflated, no one is seriously considering revisiting those pockets of fat - instead talking about raising taxes and the deficit.

l Just two months ago we said that after the cut in single parent, income guarantee, retirement and disability stipends, it is impossible to place more weight on the already-bowed shoulders of the weaker classes, and that the wealthy and public sector must be targeted next for cutbacks. Now we hear talk of additional VAT, the most regressive tax, on fresh produce: a mind-bogglingly regressive tax.

And the only thing to which the finance minister is willing to commit, is that Israel's wealthiest will not pay any inheritance tax.