The Bottom Line / Surprise! Surprise! Just what you expected!
The government budget deficit for 2001 soared to 4.6 percent of gross domestic product, and all the signs point to a deficit of 5 percent GDP for the current year - and all this sounds like good news to some politicians.
The government budget deficit for 2001 soared to 4.6 percent of gross domestic product, and all the signs point to a deficit of 5 percent GDP for the current year - and all this sounds like good news to some politicians, like Haim Ramon, Shlomo Ben-Ami and Eli Goldschmidt of Labor, Ran Cohen (Meretz) and Eli Yishai (Shas) who have constantly demanded, year after year, to increase the budget deficit, to print more money, to expand the state's meddling in the economy.
They ought to be very happy today with these two large deficits, which surely will thrust the economy forward to an era of impressive growth. How can it be though, that in the meantime, 2001 ended with negative growth and high unemployment? Such facts do not bother them.
The official explanation given this week by the Finance Ministry's accountant general Nir Gilad on the precarious deficit was the shortfall in revenues from taxes. He added that the government had not exceeded its planned expenditure, but the true picture is a little more complex.
When Prime Minister Ariel Sharon took over, he was handed a budget that had been prepared in the heady days of August 2000, with the economy in euphoria, growth at its peak, Nasdaq and high-tech still in good condition, and the negotiations with the Palestinians in full swing. In October 2000 the world turned topsy turvy. Nasdaq and high-tech took a sharp blow, the Al-Aqsa Intifada broke out, felling the tourist and construction industries, and the entire economy went into reverse.
But Finance Minister Silvan Shalom passed the budget in March 2001 as if nothing had happened. It was a budget that spoke of rapid growth of 4 percent GDP, with tax revenues rising by 4.5 percent. Immediately after passing the budget, he should have come out with a severe cutback plan. But instead, the Sharon-Shalom government decided to adopt the Negev Law, the Large Families Law, and to adopt a "business as usual" attitude with no cuts, no reforms, no privatizations. So this enormous deficit was no surprise. It was the result of a series of foul-ups in 2001.
And this year is likely to be no better. In the fourth quarter of 2001, the rate of income tax collection reached NIS 76-80 million, compared to the target of NIS 88.6 million. Shalom also wants to grant tax breaks to the real estate sector at a cost of tens of millions, but it is not at all clear how the government will agree to ease the tax burden on contractors and developers and at the same time manage to delay the implementation of the expensive Negev and Large Families Laws. So the deficit for this year will not be 3 percent (as officially stated in the budget), but around 5 percent.
This massive deficit forces the government to raise vast sums of capital, pushing the long-term interest rates up, damaging the prospects of growth and employment. Maybe next year Ramon and his ilk will finally understand that stable long-term growth is dependent on a continually shrinking government spending plan, continually falling budget deficit, structural reforms and government policy that leads to peace.