A Despicable Economic Trick

The economists from Fitch Ratings who determine the Israeli economy's risk level are being fooled big time.

Last week economists from Fitch Ratings visited Israel. They determine the Israeli economy's risk level, and therefore also the price of capital that influences investments, growth and the unemployment rate. So we're talking about a very important group of people.

To better understand the economic situation, they met with Finance Ministry officials, Bank of Israel economists, key people in the economy and economic analysts. They expressed the concern that the pressure on the prime minister will lead to reduced taxes, which in turn will lead to overstepping the budget. This would be "reason enough to lower Israel's rating," they warned.

But the prime minister's aides reassured them. They said Benjamin Netanyahu has committed himself more than once not to overstep the budget. Indeed, in conversations with Netanyahu in recent days, he repeatedly told me: "No one will act more responsibly than I regarding the budget, and responsibility means preserving the budget framework." Tough words.

The director general of the Finance Ministry, Haim Shani, is convinced that everything's all right. He recently said: "We drew up the plan without exceeding the framework." But, dear Fitch Ratings economists, you're being fooled, big time. If you check you'll see that Netanyahu and Finance Minister Yuval Steinitz are trying the old trick of making something from nothing, like the alchemists of yore.

It's astonishing to find out that the governor of the Bank of Israel, Stanley Fischer, issued a declaration of support for Netanyahu's "benefits plan." He praises the prime minister and the finance minister, "who are preserving the budget framework and not increasing the deficit." But they did.

Along with the spending, there is a NIS 300 million increase in subsidies for public transportation (an appropriate step from an economic and social perspective ), to be offset by a cut in all the ministries' purchasing budgets. Such trimming is a bad way to cut the budget. It's a trick cut that in many cases doesn't hold up for long. But so be it.

The big problem is with revenues. Here a real economic crime has been committed, a maneuver that hasn't been carried out in Israel since the 1985 stabilization plan.

Yesterday gasoline prices were reduced by 23 agorot, but no budget source was found to cover it. The budget rules say that when you reduce taxes in one place, you have to increase taxes elsewhere on the same day. No maneuvers, no delays, no tricks. But Netanyahu and Steinitz said that during the year there "might" be a surplus in tax collection, and then there won't be a need for a special source. And if that doesn't happen, the reduction in individual income tax will be postponed until January 2012.

In clearer words: Now we'll be good guys, reduce fuel taxes, the public will applaud, and later we'll manage. This is a despicable trick, economic hocus-pocus. Because if you can manage without the fuel tax, why was it imposed just two months ago? If so, maybe all the budget numbers are nonsense? And what will the ministers think now? That they can propose more tax reductions without it costing them anything?

And what's this business of reducing taxes in 2011 and (maybe ) raising them in 2012? These are two separate budget years, and Udi Nissan, the head of the Finance Ministry's budget department, explicitly said that balancing the budget has to be done separately every year.

I spoke about the matter with the economist Yoram Gabbay (formerly state revenues director at the Finance Ministry ). Gabbay was shocked. He could hardly believe it. Finally he said: "The Finance Ministry can't ignore steps that it took itself, both in spending and revenues. It can't say: Let's wait and see. The minute it takes action, it must make a parallel correction."

It seems that Steinitz and Netanyahu don't care much about the criticism expressed here, but they'll care a great deal about the Fitch economists, because a reduction in our credit rating is a serious matter.

So hopefully the Fitch economists read Haaretz. If they do, they'll act and compel Netanyahu and Steinitz to mend their ways. The bottom line is that we're simply afraid, afraid to go back to the hyperinflation of the early 1980s.