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Here are some of the more noteworthy economic developments of the last year that you would not have seen in the business press.

b The government decided to cut old-age stipends, again, as it did in 2002 and 2003. Tens of thousands of pensioners were shoved below the poverty line.

b Israel's education system continued to deteriorate. International tests that gauge education quality at schools and higher-education institutions found that Israel fell several more notches, dropping below countries that used to export foreign workers to Israel.

b The crowding at hospitals worsened following cutbacks imposed by the treasury. Gaps in healthcare services for the rich and poor continued to widen.

b Budgets for the disabled, children at risk and several other underprivileged populations were slashed.

b The subsidized medicine basket was frozen. The more medicine and science advance, the farther they move from the immobilized basket of government-funded drugs, which excludes hundreds of crucial medicines.

Hmm Hang on, you protest, how could all this be? How could you have missed these stories? Didn't the headlines blare nonstop about economic growth, great year, dropping unemployment, expanding budgets, wage hikes in one sector after another?

Yes they did, and in fact, most of the things we mentioned above didn't happen. Yet. But examining the government's policies in the last year guarantee that in a year, or two or three, they will happen.

What's been hiding the real path of Israel's macroeconomic policy is the fact that for three years, the economy has been at the peak of the economic cycle. The strong global economy, together with local cutbacks and reforms in 2002 and 2003, were responsible for the prosperity Israel has felt in the last two years.

But every hide tide must recede, and when the contraction arrives, Israel's economic policy will be revealed in all its nakedness. Tax revenues will decline, the economy's openness to the world will leave policy makers all too little room to maneuver, which is also true of the towering national debt. Bereft of choices, the decision makers will have to take the axe to the budget.

And when they start combing the budget for flab, they'll discover that after the terrible war in southern Lebanon, we raised salaries in the army, we increased our actuarial liabilities to career soldiers by billions of shekels, and none of these can be touched.

They'll also find that after the teachers' strike, we gave up on reform, gave them no managerial tools to really improve the quality of teaching, and instead indiscriminately poured more money into the system. Can't touch that either.

Maybe some money could be taken from the government companies? The monopolies? some treasury clerk might venture. Not from us, will say the officer in charge of the Israel Electric Corporation, we borrowed vast amounts to invest in increased power production, the company is in debt up it its neck. And the workers have to eat. Can't take anything here.

Maybe the ports? No, will say their champion in government, the great reform we declared was actually much bells and whistles, we didn't touch the workers' pay or improve productivity. Unions linked with the political parties still call the shots at the ports. G'way.

As the treasury officials pass from budget article to article, from ministry to ministry, from monopoly to monopoly, they'll find that budgets have been wildly expanded in the last three years, yet there was no reform that might link wages to performance, performance to promotion, talent to management.

Where the ax will fall

Moving on, the treasury people will stop at welfare, health care, social security. That's big money. "A country in Israel's situation can't afford to be a welfare state," one of the naive, dewy-eyed youngsters at the treasury will blurt, revealing what they'd all been secretly thinking, but had hoped somebody else would say first. And there is where the ax will fall, and the treasury officials will talk about shirkers and imposters and inefficient systems, and in any case there's no choice. If economic crisis suddenly arrives, there will be a few hard, fast blows and if the economy slowly sinks, the cutbacks will be commensurately slow and gradual, shaving at budgets earmarked for the constantly growing needy populations.

You can already read in the papers that welfare budgets and unilateral transfers are being frozen. Not quite, actually: In the last two years the government increased unilateral transfers and welfare payments - it just gave the money to all the pressure groups in the public sector.

That massive movement of money, which will strengthen in 2008 because of the agreements the treasury has signed, is generally not structured as a reward for increased productivity, adopting better management norms or measuring achievement. It's just because. Because tax revenues ran high as the economy boomed, and because the government couldn't withstand the union's pressures.

The politicians who run our lives don't really care about all that. This week, for instance, the biggest defense budget in Israel's history, NIS 51 billion, was passed. That's even more than the defense establishment got during the intifada.

Not a peep was heard in the Knesset or cabinet about the puffed-up defense budget. Only one Knesset member decided to convene a press conference: Ephraim Sneh.

Sneh announced that the defense budget failed to answer the Iranian threat. "The root of all evil is that macroeconomic policy takes priority over government spending on the defense of the State of Israel," he said.

The root of all evil is that we're led by people like Ephraim Sneh, a decorated ex-general who, moments after retiring from service 20 years ago with the appropriate taxpayer-financed pension, of course, joined the political echelon, clutched at the government teat, and has since not spent a second outside the political system.

In Sneh's economic world, there's only one real problem, namely security threats, and only one solution, to increase the budget.

It is well and good to applaud the progress of Israel's business sector and breakthroughs by companies and entrepreneurs to the great world markets, but make no mistake, it can't replace Israel's weakening private sector. Private-sector prosperity cannot and should not come in the stead of essential services the government is supposed to supply the people. The high-tech billionaires and real estate riches won't take care of the poor and old. There can be no substitute for reforms that increase productivity and introduce management norms to the public sector. But for all this, we need true leaders.

The people gravely driveling on Channel 2 TV and on the front pages about Pakistan and Iran are not true leaders. They're just people whose death-grip on the government udder remains hidden by the smoke-screen of security, day after day, year after year, unaccountable before the public whose economic future they're robbing.