Netanyahu's Economic Policy: From Deficit Hawk to Fiscal Chicken

Netanyahu seems to be suffering from paralyzing fear over fiscal policy. Lack of action may constitute safe politics but is certainly bad economics.

Fear and greed are supposed to be the two main drivers of the financial markets. Greed, of course, is the uber-motive, the one that makes you play the market at all rather than hiding your money under the floor tiles or spending it.

But fear plays a critical back-up role, the one that holds greed back from taking too many risks. "Greed, for lack of a better word, is good, the fictional Gordon Gecko opined in the film "Wall Street." But he should have added: "And, fear is fine, too."

That's for stock market investors. For economic policy makers and the prime ministers who are supposed to lead them, neither quality is desirable. But these days it seems that it is not just that fear is the guiding force in economic policy, but that it's a paralyzing fear.

I'm not talking about Netanyahu's secret plan to re-allocate his personal financial portfolio. It's anyone's guess whether he wanted to hedge his nest egg from any financial fallout created by a military strike against Iran. What is more certain is that the prime minister was so afraid of the press and public opinion that he rescinded his request to the State Comptroller out of fear that word would get out and that he would look like someone profiting from insider information on Armageddon.

Fear-driven delays

In this case, the fear may saddle Netanyahu with a personal financial loss. But there is a much bigger fear that will affect the rest of us, namely the fear-driven delays over the 2013 budget. There is no 2013 budget, not even one in the making as there should have been since July, according to Israel's customary fiscal timetable.

Instead, there has been endless dilly-dallying. The Finance Ministry has had only preliminary discussions on the outlines of next year's budget, but it has yet to get any decision in principle about the biggest questions, such as the defense budget and budgetary priorities. The cabinet has not held any discussions at all and the latest word is talks will begin only after the High Holidays.

They might not be held at all. Netanyahu's fears are such that he is reportedly contemplating early elections either this year or early next year as a way of avoiding the unpleasant task of creating and selling to the cabinet, the Knesset and the voters a package of deep budget cuts and painful tax hikes, of which we got a small taste this year.

Just trying to wring out NIS 1.1 billion in spending cuts, an increase in VAT and small increases in income tax for 2012 was fraught with political tension. For 2013, Netanyahu has to come up with something in the order of NIS 13 billion in cuts.

Much better, the reasoning goes in the Prime Minister's Office, to do all this after a new Netanyahu government inevitably returns to office.

Back to the future next year

The catch with this plan is that it will foist on us the old 2012 budget into next year along with months of uncertainty and speculation at a time when economic conditions are changing for the worse and the financial markets are nervous and excitable.

The international ratings agency Fitch already warned a month ago that Israel's sovereign credit rating is at risk because of the unrealistic numbers the Netanyahu government is using to try to meet its deficit targets for this year and next. Imagine what it and the other rating agencies would have to say if there were no budget process at all?

Netanyahu's fear instinct has been at play since he took office. Where he was once a fiscal hawk, taking political risks by cutting spending as finance minister nearly a decade ago, today he has morphed into a fiscal chicken, taking flight at the first sign of a fight over spending demands or a tax rise.

One question people should be asking is why the government finds itself facing such difficult budget dilemmas. The economy, after all, is hardly in a recession even if it is slowing. There haven't been any big demands for bank bailouts, stimulus measures or extra spending on unemployment and other benefits.

The answer lies in Netanyahu's fear. Even as the economy was humming back in 2010 and 2011, Bibi was employing an expansionary fiscal policy: The deficit was high relative to the business cycle and on a cynically adjusted basis was needlessly higher than the average for the Organization for Economic Development and Cooperation. Taxes were being cut, but spending wasn't being cut enough to make up the difference.

Is there a strategy somewhere here?

Was there a strategy to this? Did Netanyahu and Yuval Steinitz decide that the fiscal probity that had served Israel so well, particularly as much of the rest of the world lurched into financial crisis, was no longer the way to go?

It is hard to imagine that that was the case, given the direction of the world economy and the bitter experience of Europe. Rather, policy was animated by fear - fear of striking doctors, fear that the next war would catch the army unprepared, fear of coalition partners and finally fear of the social justice movement last summer, all of which prompted the prime minister to take on a host of spending commitments that now amount to NIS 25 billion to NIS 30 billion.

With all the talk of home front security and the importance of keeping Tehran from getting the bomb, fear seems so deeply embedded in the prime minister's psyche that it seems hard to believe that he would risk the consequences of a military strike. So while we're all paying the consequences of Bibi's fear imperative, one person who should be getting a good night's sleep is the Ayatollah Ali Khamenei.