Analysis / Blue-bloods Take Care of Themselves

Three developments will give the economic plan a bad name: the decision of all parties in the Knesset (except Shinui) to cancel the NIS 40M cut in funding for parties; the agreement between Meir Sheetrit and Uzi Cohen to reduce the cut in the number of deputy mayors; and dropping the plan to merge local governments.

Three developments will give Netanyahu's economic recovery plan a bad name: the decision of all the parties represented in the Knesset (except Shinui) to cancel the NIS 40 million cut in funding for political parties; the scandalous agreement between Meir Sheetrit and Uzi Cohen to reduce the cut in the outrageous number of deputy mayors; and dropping the plan to merge local governments. These changes prove the blood of politicians is bluer than that of other tax payers, especially where the funding of Knesset members and their activities is concerned or lucrative jobs for Likud party members.

It was rather surprising to hear Benjamin Netanyahu say he agreed to reduce cuts in social budget items because he wanted to minimize any injury to the weaker strata. If that were so, why did he sponsor these items in the first place? Was he unaware of their existence? Did he not ask for explanations? Where did this sudden burst of kindness come from?

Once again, the explanation should be sought in the political realm. Netanyahu realized he was liable to get the Likud labeled as anti-social welfare, while most Likud voters come from the lower middle class. Moreover, he understood he has to get Likud a few kudo points so the party can go on working with its voters. Also, he did not want to fall from grace among his fellow Knesset members; after all, one day he plans to run for a higher office than finance minister.

There are two items that really deserved amending, as long as the budget cut (which includes the two-month deferral of the entire plan) is being reduced by NIS 1.5 billion. These items are cutting assistance to dependent senior citizens and not updating old-age allowances to reflect the cost of living increase. Senior citizens who do not have any other source of income except government allowances are the weakest population in Israel society, and not a penny should be taken away from them under any circumstances. Also, the money that is to be cut comes from the contributions that these people have made to the National Insurance Institute throughout their working years; after a person retires, he no longer has the option of working overtime to supplement his income. He cannot move up on the ladder and improve his financial situation. The amendment of these two items is therefore a welcome change.

The rest of the items, mainly child allowances, are open for debate. The concept of stopping differential allowances stems from the policy that excessive numbers of children should not be encouraged. In very large families, there is often no possibility to give the child even the bare necessities. Differential allowances that offer increased allowances from the fifth child on motivate some parents to live on welfare without working at all.

Currently, the allowance for the fifth child on is five times larger than that for the first child, although the cost of the first child to the family is highest.

Minister of Social Affairs Zevulun Orlev contested the notion of dropping the differential scale. He and Netanyahu agreed to establish a committee to review the possibility of taxing the allowances instead of reducing them, but this is even a worse option than the current situation, because people who work and pay tax are also the ones whose allowances will be taxed. Thus, secular middle-class families that have an average of two to three children would be the ones to carry the burden. At the same time, parents who do not work will not pay tax on their child allowances, since they have no taxable income. This would be a further incentive not to work.

Despite his efforts, Netanyahu was unable to secure the full NIS 11 billion he has sought (a NIS 9 billion cut and a transfer of NIS 2 billion to the Ministry of Defense). Also, he has yet to make decisions about growth-generating structural changes, such as breaking up the Israel Electric Corporation and allowing competition in this sector (he has the union to fight), and implementing the pension-fund reform (he has the Histadrut to battle) so one million present and future pensioners may rest assured their pension savings will not go down the drain.

But Netanyahu has given his word to the United States as to the amount of government expenditure this year and will therefore have to introduce another plan to cut a further NIS 1.5 billion soon, because if the government exceeds the cap, the loan guarantees may be compromised. It was in anticipation of these guarantees that the exchange rate has fallen so sharply of late, including the drop on Friday.

Local and foreign banks, which are the major foreign currency traders, have concluded that at present, thanks to the loan guarantees, Israel is not facing any foreign currency problems. This will enable the treasury's accountant-general, Nir Gilad, to raise $3 billion in long-term loans within a month or two, an amount that will cover all of Israel's foreign currency needs for the coming year. The Israel Defense Forces is also expected to get a special $1 billion grant within the next few weeks.

Taking into account the approval of the economic recovery plan by the Knesset, and the prospect of talks based on the road map to peace, one can say the threat of a major currency devaluation has significantly receded. The banks and the public are therefore selling their dollars and reinvesting in shekel deposits, which offer 9 percent interest, compared to 2 percent on dollar accounts. The sharp 2 percent revaluation of the shekel on Friday was hardly surprising.