2004 - a Turning Point

There is no inflation, the dollar is calm and interest rates have sunk to the lowest level in history. Perhaps the social champions should apologize to Netanyahu?

Imagine a situation in which growth per capita had continued to decline in 2004 for the fourth straight year, the standard of living had continued to plummet and unemployment had reached new heights. What would society's champions have said? We were right, they would have declared. We told you that this was what would happen, that this was the result of [Finance Minister] Benjamin Netanyahu's cruel policies.

But what can you do? The Central Bureau of Statistics this week published rosy figures for 2004. Growth per capita increased after three years of declines. The standard of living (private consumption per capita) rose by 3.5 percent after falling for three years. Work productivity climbed sharply, real wages were up and even the unemployment rate declined - from 10.9 percent a year ago to 10.1 percent now. The balance of trade recorded a surplus and the monetary landscape is stable: There is no inflation, the dollar is calm and interest rates have sunk to the lowest level in history. Perhaps the social champions should apologize to Netanyahu?

Nevertheless, it is far too soon to rest. The year 2004 is only a turning point. It is impossible to cure a severe socioeconomic condition in just one year. Too many people still live below the poverty line, wages are too low and the gaps between the rich and the poor are too wide. We are moving in the right direction, however, and if we continue to do so for a few more years, we will see how the work revolution and the reforms change the face of society, narrow the gaps and alleviate poverty. The social champions will see it - and not believe it.

Former finance minister Silvan Shalom and Netanyahu began this fundamental change in the economy: the work revolution. For 30 years (since the Yom Kippur War), Israeli governments had followed a cynical policy of distributing allowances and did not take care of improving education in outlying areas, professional training or social infrastructure - but instead systematically increased allowances and even gave those who were not working more and more benefits (such as discounts on municipality taxes and rent subsidies).

Anyone who decided to live from the labor of his hands was rewarded only with decrees, higher taxes and more compulsory payments. As if that were not enough, 10 years ago, under pressure from the farmers and industrialists, the government decided to import cheap manual labor, which forced wages downward. The result of these processes was the ejection of Israelis from the work ranks to the ranks of the unemployed and those receiving allowances, creating an urgent need to levy more taxes on those who worked - in order to finance the many who were not working - in a vicious cycle.

Shalom and Netanyahu halted this destructive process. Shalom began the process of cutting allowances and reducing taxes on earned income and Netanyahu stepped up the pace while reducing the number of foreign workers and cutting the state budget. It is no wonder, therefore, that 100,000 Israelis joined the work force this year - in the business sector, not the civil service.

Starting next week, income tax will come down. Marginal tax, which was 60 percent until two years ago, will drop to 49 percent (including National Insurance Institute deductions and health tax). Anyone earning NIS 4,000 per month will not pay any income tax. Is it not clear to the social champions that, without cutting the budget (government expenditures), it is impossible to lower taxes (state income) and without lowering taxes it is impossible to encourage people to work and to spur investments and growth?

Next year will bring with it a new government. On the one hand, there is the risk that the Labor Party will not support the continuation of the budget cuts (and there must be cuts, mainly in the defense budget) and that Labor ministers will oppose important reforms in the sea ports, the Israel Electric Corp., the banks, the Israel Airports Authority and the Israel Lands Administration. If that happens, the economy's recovery will be halted.

On the other hand, Labor is entering the government in order to implement the disengagement plan, which will be a mighty engine for renewed investments and rapid growth. Which is stronger? The diplomatic factor. But the importance of the reforms must not be downplayed. The combination of the two is the winning combination for 2005.