Irresponsible 'Experts' Will Bring Israel's Economy Down

Arguing that Israeli leadership as irresponsible is popular but in the case of economic planning, however, the irresponsible populists are the 'team of experts.'

It's hard to understand Prime Minister Benjamin Netanyahu, Finance Minister Yuval Steinitz and Manuel Trajtenberg, the chairman of the committee looking into changes in socioeconomic policy. Why are they so insistent on maintaining the overall confines of the current state budget? After all, they have wonderful means at their disposal to become immensely popular.

They could accept the recommendations of a group of people who, at the peak of their modesty, accepted the label the "team of experts" of the social protest movement. They could increase the state budget by tens of billions of shekels and direct the money to education, medical care, housing and social welfare services. This would prompt thunderous applause from the public at large, which in all innocence would believe that their lives would soon become some kind of utopia.

Yossi Yonah, who is one of the members of the "team of experts," doesn't deal with trifling matters. He says that "what is needed are hundreds of billions of shekels to correct the injustice."

The other "experts" offer us a whole range of goodies - an increase of 30 percent in the education budget, free education from six months of age to a university B.A., the elimination of school fees, a reduction in class size to a maximum of 21 students, an increase in all social welfare allowances, an increase of NIS 10 billion in the health budget, free universal custodial nursing care and dental care, and, in addition, a shorter work week and longer vacations. And that's just a sample of their generous recommendations.

What they are saying is that we'll work less, enjoy ourselves more and get more in government services. So who would object to such a utopia?

The "team of experts" proposes that these marvelous benefits be funded through a dramatic increase in tax rates, putting Israel among the top countries in the world in terms of tax burden. They want to raise the marginal income tax rate to 55 percent, the capital gains tax to 40 percent and the corporate tax to 31 percent. They're mistaken in their calculations, however. Even such major tax increases won't be enough to fund Yossi Yonah's "hundreds of billions of shekels."

And that's not all - because two other members of the "team of experts," Avia Spivak and Joseph Zeira, also made their own basic economic error. They have assumed that taxes can be raised to an unreasonable level, in fact much higher than what is accepted in the Western world, and still not hurt economic growth and employment rates. They also mistakenly assume that foreign investment in Israel will continue at the same pace and that local investors won't flee elsewhere.

In fact, investors were promised that corporate taxes would be reduced to 18 percent, while the "experts" are now saying they should be increased to 31 percent, and they don't understand that tax rates are one of the most important variables affecting decisions on where investors put their money.

It's also clear that if the marginal tax rate is raised to 55 percent, tax evasion will increase to record levels, and there are innumerable ways to legally avoid taxes. In fact, we have learned from past experience that when you raise taxes to unreasonable levels, the number of tax evaders increases, too, while tax revenues actually go down rather than up.

In addition, the very act of sharply increasing public expenditure does damage to economic growth and employment levels, leading in turn to recession and reduced income tax revenues. The more the government takes resources from the economy, the less will be left for the business sector, which will decline in the process. There will be less growth, fewer competitive places of employment and less tax revenue going to the government. This means that a sharp increase in public expenditure along with a drastic rise in tax rates will actually increase the budget deficit, despite comments by Spivak and Zeira to the contrary.

And a large state budget deficit leads to large public debt, lower credit ratings, damage to economic growth and higher unemployment.

The Israeli economy has two anchors - the size of its budget and the size of its deficit. If the lifeline to one of those anchors breaks, the ship of state will teeter, and waves will wash across its deck; but if we cut it off from both anchors, the ship will be swept away by the waters of the global financial crisis and will be consumed by the waves.

Netanyahu, Steinitz and Trajtenberg want to spare us this bitter fate. As a result, they are forgoing the affection of the public now to gain the public's favor later. At that point, everyone will be more sober and understand we cannot shell out hundreds of billions of shekels and still avoid collapse.

Just look at Greece, Portugal, Spain and Ireland. It is rather acceptable in Israel to defame our leaders and argue that they are irresponsible and think only of themselves. In this case, however, the irresponsible populists are the "team of experts."