When Benjamin Netanyahu began serving as finance minister 15 months ago, the economy was in crisis. Interest rates were sky high, the stock market had hit rock bottom, and Israel was incapable of borrowing a single dollar in the world. But it was this atmosphere of crisis that allowed the minister to carry out a series of drastic cuts and important reforms.
Netanyahu made deep cuts in the budget, reduced wages in the public sector, dismissed 750 people in the government sector (and caused the retirement of 2,500 people in all), cut allowances for those with guaranteed income, waged a serious battle with the leader of single mothers, Vicky Knafo, and even nationalized the pension funds from the Histadrut labor federation. These are moves that are almost impossible to implement in a normal period.
But now, 15 months later, it looks as though the finance minister is doing everything possible to signal that victory already has been achieved, that the economy has been rescued, that growth is guaranteed with the only argument being whether it will be 4 or 4.5 percent next year, and how far unemployment will decline - to 10 percent or even less. And in order to prove that everything is really all right, as of yesterday, he even lowered the income tax for middle- or lower-income wage earners - a step that is correct in principle but whose message is clear: "I have it." And thus, in the new atmosphere he has created, it will be very difficult for him to convince the public that he has to cut another NIS 6 billion from the 2005 budget.
These billions are a result of the "automatic pilot," additional expenditures that are caused by annual population growth, an increase in the number of students, the elderly and the ill, and additional expenses arising from legislation that was passed by the Knesset during the year. In 2005, there is an additional problem, due to the end of the period of salary cutbacks in the public sector.
In July 2005, the Finance Ministry has to restore the salaries of public sector employees to their level in June 2003, because the agreement with the Histadrut determined that the cutback would be in force for a limited period. In other words, next July, public sector salaries will increase by an average of 5 percent, which means an additional NIS 2.4 billion. And if we add to this other expenses stemming from the population increase, it is clear why NIS 6 billion needs to be cut if we want to stick to a program involving a moderate budget increase (1 percent in real terms) and a reasonable deficit of 3 percent of Gross Domestic Product (GDP).
But Netanyahu has shot himself in the foot. He has made the public believe that growth is already a forgone conclusion, that the horizon is rosy, and if that's the case, why sacrifice more? Even his coalition is weak. He no longer has former minister Avigdor Lieberman and the National Union, who supported all his economic moves, so the window of opportunity for revolutionary change has shut.
The result is that today, a weak voice is being heard from the direction of Netanyahu and the treasury. They are no longer talking about the "fat man and the thin man" (the pubic versus the private sector), nor about sharp cuts carried out with an ax, but about "localized changes"; there is no talk of dismissals but of streamlining and mergers. No more major reforms like the dismantling of the Israel Electric Corporation and the Airports Authority and the closing of the Israel Lands Administration, but minor completion of reforms in the Public Works Department and Postal Authority. And we'll see what remains of talk about dismantling the Ports and Railways Authority and removing the providential funds from the banks.
Therefore, given the situation that has been created, Netanyahu will be unable to make significant cuts in the civilian part of the budget - allowances, wages, health services, education and welfare. In order to get the NIS 6 million, he will have to convince the prime minister to make a major cutback in the security services. There has been a revolution in Israel's strategic situation. The eastern front has, in effect, disappeared, and implementation of the disengagement plan will remove a great burden from the IDF. The completion of the separation fence will also reduce risks. At the same time, the IDF and security apparatus can afford budget cuts. They have many billions of shekels that haven't been touched yet. Perhaps this time, Netanyahu will succeed in slaughtering the last sacred cow in the herd.
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