Everything Looks Rosy at First

Another reason the finance minister's problem is particularly serious is that some economists have begun to engage in heresy.

Prof. Manuel Trajtenberg, the prime minister's economic adviser, was very open. He told participants at the Caesarea Conference last week about his surprise when he moved from academia to his post in the Prime Minister's Office. When Trajtenberg served as an economics professor at Tel Aviv University he assumed that when the budget passes in the Knesset and becomes a binding law, the struggle over resource allocation ends, political quiet prevails, and everyone starts dealing with distributing the funds in accordance with the law. But once he got to the Prime Minister's Office, he discovered that real life is very far from this idyllic description - as distant as Ehud Olmert is from Benjamin Netanyahu.

Trajtenberg revealed that as soon as the budget is passed in the Knesset, on January 1, everyone starts eating away at the next year's budget, even though it doesn't exist yet. The ministers, the Knesset members, the lobbyists, the interest groups - everyone demands more. Defense demands an increase, education wants reforms, the home front calls for defense. Holocaust survivors need to be helped, polio victims need to be compensated and the prime minister has a "social agenda" that costs a lot of money. Every day there are new, and expensive, decisions dealing with a specific issue that are made by the cabinet or a private member's bill in the Knesset or by the High Court of Justice, which occasionally rules on economic issues. In addition, there is automatic pilot, which means an automatic increase in expenses in the wake of population growth.

All these decisions are made in isolation from the big economic picture. And so it is that July comes around and it turns out that nothing new can be implemented in the 2008 state budget. It's impossible to decide on new priorities because there are surplus demands to the tune of NIS 9 billion - and then the entire struggle focuses on the NIS 9 billion cut the ministries will be forced to sustain. After all, we need to uphold the limit on government expenditure.

And thus did a new finance minister take up his post and his first task is not to set new priorities or attempt to advance his worldview, but to carry out one thing only: painful cuts. The problem of the new finance minister is more difficult this year than usual because we have an unstable government, Olmert is not in control of the coalition and no one knows if the prime minister will survive the Winograd Committee's final report on the Second Lebanon War or the criminal investigation of his role in the sale of the controlling interest in Bank Leumi. Therefore, every minister and Knesset member is already running full speed ahead to the next primaries; and since they want to win the goodwill of the public, they vehemently object to any financial cut.

Another reason the finance minister's problem is particularly serious is that some economists have begun to engage in heresy. They argue that it is possible to increase government expenditures by more than 1.7 percent a year, because we have already reached a state of respite. The economy is growing nicely, the public debt is decreasing in relation to the gross domestic product, so it's possible to go off the diet and start eating carbohydrates and fat, and even enjoy some candy.

It appears these economists, however, have never even been on a diet. They don't know how hard it is to lose weight or how easy it is to gain it back. They don't understand that in order to continue to grow, we need to continue with a diet that is tough on the "fat" (the public sector), because that is the only way to transfer resources to the "thin" (the private sector), which is generating new jobs, increasing productivity and lowering unemployment = and bringing about growth and well-being.

At the Caesarea Conference, Bank of Israel Governor Stanley Fischer for the first time publicly expressed concern for the state of the budget. "If the Israeli economy wants to continue to succeed, it must continue to uphold budgetary discipline, in an effort to minimize the size of the government and limit the deficit rate."

"It's clear that the government in Israel is still too large," said Fischer. He didn't hesitate to add that the increase in government expenditure must be restricted to 1.7 percent.

We must therefore hope that the new finance minister will treat the governor's recommendation seriously. He must know that choosing the easy way of increasing expenses is like injecting heroin directly into a vein. It's a great feeling at first, makes everything look rosy and it provides a sense of power. But the next morning, you wake up with a serious and debilitating condition.