The Shekel Stops Here / The Defense-spending Scapegoat

Our last article in the series looks at the heaviest expenditure in the budget, and debunks a persistent myth

This last of the six-part series on the challenges facing the Israeli economy looks at the biggest outlay by government: the defense budget. The following analysis is based on the graph originally published in The State of the Nation report by Dan Ben-David, professor of economics and executive director of the Taub Center for Social Policy Studies in Israel.

The Defense Ministry budget for 2009 and 2010 was NIS 50 billion in each of those two years. That works out to about 15% of the national budget, which is very high. Of course, we have become accustomed to that. Since its earliest days, Israel has always devoted a large part of its budget to security, mainly to the Israel Defense Forces (the military ), but also to other security forces as well.

We have also become inured to the heavy economic price these giant budgets exact, both in direct financial terms and in terms of loss of civilian workforce.

Most Israelis accept the situation. There is no question that the threats to Israel have been existential, and it is reasonable for defense budgets here to be greater than those allocated by countries blessed with tranquillity and secure borders.

Over the years, the defense budget has attained the status of a sacred cow, precisely because of our existential need for security. While that's a good reason, the problem is that the defense budget has spiraled out of control, inflated by other elements that are not purely related to our safety and that - although financial, not top-secret security matters - are not subject to public monitoring and control. They include pay in the defense establishment and the electoral clout of employees there.

Not everybody agrees that the defense budget is padded with flab. Moreover, a cold-eyed numeric analysis concludes that the significance of Israel's heavy defense spending has been overstated. It is not the primary reason that Israel's society and economy lag so far behind the leading Western countries in so many areas.

The bar chart breaks down total public spending in Israel compared with the average in the Organization of Economic Cooperation and Development, which admitted Israel in May. Each of the three items in the chart is shown as a percent of gross domestic product over 20 years, from 1985 to 2004.

The chart shows that in those 20 years, Israel's spending on defense was four times higher than the average in the OECD: 10.4% of GDP compared with 2.8%.

Its outlay on interest payments was also very high: 7.4% of GDP, compared with 3.1% in the OECD.

But, and this is the point, the remaining public expenditure in Israel - all of it civilian expenditure - averaged 35.6% of GDP, which is about the same or in fact slightly higher than the OECD: 35.4%.

This means that despite the heavy spending on defense, the services government supplies to the people in Israel - in terms of cost - is the same as in the OECD.

We must conclude that the reason the standard of living in Israel lags behind isn't that the government is chintzing on civilians, says Ben-David. The reason lies in national priorities - how the money is spent.

The OECD nations spend a greater proportion of money on physical infrastructure and higher education than Israel does, he adds. Moreover, roughly equal proportions of spending on elementary school education achieved much better results in the OECD countries than here.

In the OECD nations, much of the budget is spent on investments so the next generations will be more productive and efficient, while in Israel, the budgetary emphasis is different. As for interest payments, the reason Israel pays so much more in terms of GDP is because it had greater government debt: Public spending in Israel outstripped income over decades. The upshot is that Israel spent twice as much each year on interest than on elementary and high-school education.

In other words, if Israel were to change the national priorities that determine its spending and put more into physical and human capital investments, laying the infrastructure for a more competitive modern economy, it could ultimately reduce future non-infrastructure expenditures - income support, for instance - on working-age adults.

A more skilled and educated society living and working in a more modern competitive economy would have fewer poor people, would be able to produce more and would be better able to support Israel's unique defense burden, which means less government borrowing in the future and lower interest payments.

To reach that goal, Ben-David makes it clear that the main reason for Israel's severe social and economic problems over the past few decades is not insufficient funds resulting from heavy defense spending. Israel's current situation is a direct result of problematic national priorities that determined allocations in a civilian budget that was on par with the OECD average for two decades.