Analysis

Kahlon’s Populism Will End Up Costing Us All Dearly

The credit rating report on Israel by Fitch this week is a warning about the growing price his policies are imposing

Israeli Finance Minister Moshe Kahlon speaks during a ceremony in Jerusalem on December 24, 2018.
\ AMIR COHEN/ REUTERS

Just like Donald Trump hailed the Mueller probe’s conclusions for clearing him of collusion with the Russians during the 2016 elections, Finance Minister Moshe Kahlon hailed the latest report by Fitch affirming Israel’s credit rating at A-plus with a Stable outlook.

“A band of bullies is doing everything to put the economy into reserve, and harm the middle class and the young families. ... A sane economy serves society and the citizens, not just the privileged and the connected,” Kahlon said in response to the Fitch report and raged at those who he said blame him for the government’s growing budget deficit.

But, just as Trump ignored the fact that Mueller had hardly exonerated him for all misdeeds, Kahlon’s praise of the Fitch report’s overlooks the fact that the credit rating agency didn’t exactly praise the treasury policies.

“Israel’s public finances remain a weakness relative to ‘A’ category sovereigns, despite a strong trend of improvement in recent years, and the fiscal outlook has become more challenging in the near term,” Fitch said in its report released on Monday. It warned that rising government debt threatens to cause deterioration in Israel’s debt-to-GDP ratio.

The Israeli ratio “remains significantly higher than the A median of 49% in 2018. The general government budget deficit and interest spending/revenue are also weaker than the peer medians. ... We forecast that the government debt/GDP ratio will edge up further in 2019 and 2020 on the basis of larger deficits,” Fitch said.

>> Growth of Israel's debt is Kahlon’s failure | Editorial

It warns that apart from the usual political and security risks Israel contends with, the main factor that could cause Israel’s credit rating to be downgraded is “sustained deterioration of the government debt/GDP ratio, either through widening fiscal deficits or a structural decline in GDP growth.”

Kahlon doesn’t entirely misinterpret the Fitch report, but the document makes clear that Kahlon’s management of government finances in the past year was far from brilliant and the problems have begun to surface.

Kahlon erred when he chose a political appointee, Shai Babad, as the treasury’s director general, which strained relations with the ministry’s professional staff. Kahlon’s view that “a sane economy serves society and the citizens” is widely shared but not when what emerges from it is a constant increase in government spending without a parallel increase in revenues from taxes.

Even if on the balance we think Kahlon deserves no more than a B-plus as finance minister, we have to come to his defense. That’s not only because he has shown himself to be a fair and hard-working politician, in contrast to the great majority of his peers, but he has actively pursued his “sane economic policy.”

Most of the policies he undertook were reasonable and had the laudable goal of increasing civilian spending, The problem was his inability to strike a proper balance between that and the need to look after the state’s pocketbook either by making government more efficient or by raising taxes. He wanted to be popular at the expense of being professional.

Thus the plan that’s become his campaign’s banner issue for his Kulanu Party, subsidies for preschool  daycare and the transfer of responsibility for it from the Welfare Ministry to the Education Ministry, ensuring that daycare has a pedagogic component and not just a babysitting role for working parents.

The fact is that daycare for the very young is an enormous financial burden for middle class families (the poor have long enjoyed government assistance). More than that, studies have shown that preschool programs have an important positive effect on children and aiding families to ensure children get it should be a national undertaking.

Still, Kahlon’s plan presents at least two major problems.

The first is the cost and how to finance it. Today the government provides financial help for 120,000 young children by subsidizing 50% of the daycare costs, which adds up to 1.2 billion shekels ($330 million) annually. 

Kahlon’s plan would expand the number of children covered to 450,000 at a cost of up to 4.8 billion shekels and that’s before the one-time costs of building new facilities that will add another 4 billion shekels to the bill.

Kahlon’s proposal is good but very costly. Where will the money come from? If not from an increase to the state budget, what other programs will be cut? We can only hope his plan isn’t to pay for it by increasing the deficit because we know from Finch what the consequences will be.

The second problem is implementation. The plan calls for the government to issue vouchers of up to 1,200 shekels a month per family to choose their own facility, but the experience of similar programs is that daycare operators will simply increase the fees they charge. The government won’t be subsidizing parents but daycare operators.

To solve this problem, the state will end up complicating a simple idea by imposing price controls and a system of enforcement.

Like a lot of Kahlon proposals, the daycare subsidies are a good idea, but they don’t seriously try to address the costs and other problems they are bound to create. They are popular but pricey and it’s Fitch and the other credit rating agencies who are already warning us of the costs.