Fortune seemed to be with Yair Lapid until now. His election campaign captured the Israeli Zeitgeist and he found an unlikely but extraordinarily useful friend in Naftali Bennett for the coalition talks. But it seems that fortune has abandoned him over the past two weeks, just as he completed his move from the TV studio to the Finance Ministry.
The economy is slowing, the Cyprus bailout has raised new questions about the world economic outlook and he has been bequeathed a fiscal disaster. The Haredim and the Histadrut would be happy for him to fail. Lapid has stormed into the political battlefield as the fighting hero of a new politics (and dare we say, a new economics) but is already ducking under fire from the old economics and politics.
Looking down a deep, dark NIS 30 billion budget hole, it might be hard for him to see any light. But, in fact, Israel’s fundamental situation is not at all bad. The taxes he will be raise are not as high as people think, the average Haredi on the street not so resistant to work and the economic engine of exports not in such a funk.
TAXES: It is hard to see how everyone’s tax bill isn’t going to go up considerably this year. The latest plans being concocted by treasury officials include raising the capital gains tax to add revenue by up to NIS 4 billion, and imposing an across-the-board increase in rates of one percentage point for the personal and corporate income tax as well as the value-added tax.
Officials are also weighing ending exemptions on VAT for fruits and vegetables and on advanced-training funds. No doubt these are opening volleys in what is gong to be a very hard-fought budget war, but the extent of the fiscal hole is so big that despite his paeans to the middle class, the average Israeli taxpayer will be worse off in Year One of Finance Minister Lapid.
But the pain should be put into perspective. Although his boss, Bibi Netanyahu, created the fiscal mess we are in now, in some ways he did so by reducing the middle class’ tax burden. The tax burden in Israel was less than the average countries belonging to the Organization for Economic Cooperation and Development before the global ﬁnancial crisis and has fallen steeply since then. In 2000 it was 36.6% of gross domestic product, compared with an OECD average of 35.4%; by 2011, Israel’s was 32.6%, compared with 33.9%.
Put another way the so-called tax wedge on labor – the difference between labor costs to the employer and the corresponding net take-home pay of the employee – was just 19.2% for Israel last year, versus 35.6% for OECD countries on average. For a family with two wage-earners and two children, the tax wedge fell from 20.7% in 2000 to 13.9% in 2009 and 12.7% in 2012.
Taxpayers in other OECD countries are no doubt getting more for the taxes in the form of better government services, a social safety net and quality education. We have higher defense expenditures and a larger part of the country schnorring rather than working as it should. The cost of living is higher. But the Israeli taxpayer isn’t getting quite as ripped off as he or she might think and the economy may not suffer even with a round of tax hikes.
HAREDIM IN THE WORKFORCE: If Israel is going to get through this period of austerity and enter a brighter future, more people have to be working at productive jobs, particularly ultra-Orthodox men and Arab-Israeli women. In fact, that has been happening.
Long before Lapid entered office, Haredi men began entering the labor force in greater numbers. In 2011, just over 45% of those aged 25-64 were in the labor force, up from 36.2% in 2003, about the time that the regime of state handouts began to come under pressure from then Finance Minister Benjamin Netanyahu
There is still a lot of work to be done. The average rate for all Israeli working age males was 77.7%, but the figures do show that Haredim aren’t nearly as resistant to working as the political leadership insists. There’s a lot of smoke on this issue, but far less fire. The same goes for Arab women, although the changes have been less dramatic. In 2003, only 20% of working age Arab women held jobs; by 2011, the rate was 26.8%.
Lapid’s real challenge won’t be coaxing either group iton the labor force but ensuring they can find work and acceptable wages. For Haredi men, whose years of education don’t add up to anything resume-enhancing, the labor statistics are disheartening. People with 16-plus years of education are more likely to be working (81.9%) and earning more (NIS 14,766 a month) than people at the bottom of the education ladder with no more than 10 years of schooling (61.4% and NIS 5,825).
FOREIGN TRADE: Merchandise exports are a critical part of the economy, but, not counting diamonds, they fell last year, and the Bank of Israel has revised the outlook for this year for growth of just 2.1%. But the trade picture on the whole is quite bright.
First of all, the 2012 decline followed two years of solid growth in during which Israeli exports grew at a faster pace than global exports – 29.7% in 2010 and 2011 versus 19.5% for the world.
Second, the trade figures say less about Israeli export competitiveness than they point to the weakness of our biggest trade partners – the United States and Europe. Exports for those two markets were down, but for Asia exports continued to grow by about 5% and to China by more than 6%.
Third, the trade data show that for all the talk of boycotts, Israel has little to fear. Look at three countries where the boycott, divestment and sanctions movement makes a lot of noise. Israeli exports to South Africa climbed 35.6% in the last three years, to Britain by 148% and to Turkey by 32.3%. Exports to Turkey were down sharply in 2012, but they are still much higher than they were before the Mavi Marmara incident.
What the trade figures also show is that Israel has yet to exploit its export potential. The fact is that in 2012, we were exporting more goods to the European Union despite all its economic woes last year (31% of total exports) than in 2009 (29%). Asia hasn’t been tapped to anywhere near its potential: Its share of Israeli merchandise exports grew to 21% of the total from 16%, hardly an impressive rate. One of the region’s biggest markets – India – accounts for only a tiny and declining share of Israeli exports (2.9% in 2012 versus 3.3% in 2009).
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