Excellent Fuel for Our Growth Engine

No one expected the Israeli economy to recover so quickly from the world economic crisis and attain 4.1 percent annual growth and unemployment of just 6.2 percent.

The Hebrew year just ending, 5770, was a good one from an economic perspective. It was also a surprising year. No one expected the Israeli economy to recover so quickly from the world economic crisis and attain 4.1 percent annual growth and unemployment of just 6.2 percent. Nor did anyone predict that, despite the strengthening shekel, Israeli exports would increase so nicely.

Clearly, if the economic data were weak, we would be blaming Finance Minister Yuval Steinitz and Prime Minister Benjamin Netanyahu, so in all fairness, the two should be complimented. But why is complimenting them so hard? Why is there a sense of lost opportunities?

It's because we could have done even better. We could have achieved higher growth. We could have been building the economy for the long term, making changes and instituting reforms. This past year, however, has not been one of change but rather more of the same.

It's true that Steinitz and Netanyahu have not increased government spending at the mad pace cabinet members wanted, but they still increased it too much, and the increases were not geared toward investment in infrastructure and education, but rather toward placating Shas and Labor Party voters.

Steinitz and Netanyahu increased funding to yeshivas and made it a core budget allocation. They even agreed to expand child allowances, damaging Netanyahu's major achievement of 2003, which cut these allocations and encouraged people to enter the workforce. We also haven't forgotten the agreements the two made with the Labor Party and the veto power they gave Histadrut chairman Ofer Eini.

The result was that all important economic reforms were stalled. There has been no reform of the Israel Electric Corporation. There is no Wisconsin welfare-to-work program. Israel Military Industries has not been privatized, and neither have the ports or airports. Even the reforms of the Israel Lands Administration and the planning and building committees are stalled. Since it is known that such reforms grease the economy's wheels, it's no wonder that the economy is moving forward more slowly than it could.

And when spending is increased, taxes also have to be raised, and that's what happened over the past year. Marginal tax rates rose to a global record of 57 percent after ceilings on National Insurance Institute payments were raised. It's true that the damage caused by high taxes is not visible in the short term, but the harm will surface in the long run, when developers and high-tech business executives, as well as doctors and engineers opt to work and do business abroad and the pace of growth declines.

There are also external reasons for our nice growth rate - the whole world is growing. India and China enjoy high growth rates, as does South America. Even Europe has managed to recover from the debt crisis and make the transition to growth. Only in the United States do fears still lurk about the future. For an economy based on exports such as Israel's, an expanding world economy provides a real push forward.

It has also become clear that the Israeli business manager is flexible and knows how to seek out markets and develop products rather than give up when things get tough. The business sector has been streamlining and taking steps to cut costs, including salary cuts but few layoffs, and that's a real badge of honor for the Israeli business executive. Our economic growth is also thanks to him.

If so, where was Steinitz and Netanyahu's lost opportunity? They didn't deal with the Israeli economy's basic problems over the past year. They didn't encourage ultra-Orthodox men to join the workforce, nor did they do so with respect to Arab women, most of whom don't work. They didn't demand the introduction of the core curriculum in the separatist ultra-Orthodox education system, consigning 25 percent of first graders to a bleak future when it comes to employment. (On this subject, it is Education Minister Gideon Sa'ar who is largely to blame. )

They haven't dealt with the problem of the bureaucracy that has been strangling the economy and making it harder to do business in Israel. They didn't even touch the issue of our low level of service and the antiquated public sector. They haven't tried to address the exaggerated number of local authorities, but they have continued to increase the defense budget even though it must be cut and streamlined.

The past year has also been one of lost opportunities from a diplomatic standpoint, but suddenly, at the end of the year, opportunities have popped up. It is therefore appropriate to note that peace not only addresses the problem of security. It is also the best fuel for our growth engine.