Accounting for Israel’s Bookkeeper-in-chief

During his term as finance minister, Yuval Steinitz managed the books competently, but missed opportunities for visionary leadership.

Yuval Steinitz is beside himself with grief. For three years he's been strutting around like a proud peacock – pleased with his invention of the "biennial budget," Israel's relatively low unemployment rates compared to Europe and the United States, his country's entry into the Organization for Economic Co-operation and Development and the battle he conducted over natural gas royalties. But suddenly, 10 days before the election, he's been given a failing grade on the treasury's main task: guarding the state's coffers. The revelation of the frightening government deficit, 4.2 percent of gross domestic product, has turned what economists have known for close to a year into public knowledge: The Finance Ministry and Netanyahu government over the last two years implemented a policy of spendthrift expenditure combined with slightly grandiose revenue forecasts.

It's no secret that the role of finance minister is a thankless one, where achievements evaporate the moment new and frightening data crops up. It's also no secret that the finance minister is always under attack – when he stands tall against the wage demands of doctors, nurses and contract workers and when payday arrives and it becomes apparent that the salary supplements he paid out have left the state overdrawn and cutbacks must be made. Sometimes the same people attack him when he safeguards the public purse as when he doesn't. It's also no secret that the finance minister doesn't call the shots on the Israeli economy, the prime minister does – especially the current one, who declared himself the "supreme minister for economic strategy" at the time of Steinitz’s appointment.

Accounting while Israel burned

These things are known, so Steinitz can't complain too much. Despite his problematic finale and the difficult legacy he is leaving his successor, Steinitz definitely wasn't the worse finance minister in Israeli history. When he took office, he lacked knowledge of economic management, and he was fairly quick study of the issues that popped up. During the first two years, he didn't make any significant errors, and he played an important role in stabilizing the economy after the global financial crisis that erupted in late 2008.

His problems as finance minister began after the economy stabilized. This was the moment he started to brag about the stabilization, taking full credit for it in an embarrassing public-relationsbattle with Bank of Israel Governor Stanley Fischer. At the same time he also succumbed to his inner philosopher (his profession by training), mocking the economists and their responsibility for the global crisis. Instead of initiating things, Steinitz was a rather passive minister, primarily responding to events. The prime minister overruled him again and again. Steinitz's boasts about the economy's achievements also cost him during wage-hike battles with public sector employees and his obsession with the biennial budget means that at the end of the day he's ending his current term on the verge of an economic crisis.

To examine Steinitz's track record, we need to start by asking whether the role of finance minister in Israel is just to manage the budget and protect the country’s coffers in the short-term, or to plan and manage the economic policies of the government and lead it towards medium and long-term growth.

The first role is essentially that of a type of treasurer-accountant, engaged in keeping to the budget. The second role requires vision and long-term commitment, as well as political power and stamina. Throughout most of his term, Steinitz assumed the former role. He wasn’t particularly interested in analyzing the structure of the business sector and its sources of growth. Nor was he determined to carry out public sector reforms.

The reform to reduce the level of concentration in the Israeli economy was foisted upon Steinitz by the Prime Minister's Office and has yet to be completed. Steinitz began addressing the problems in Israel' Fire and Rescue Services only after the disastrous Carmel blaze and started tackling the salary complaints of contract workers only after the Histadtrut labor federation threatened to strike.

Steinitz's big accomplishment was his role in increasing government royalties from Israel's natural gas discoveries in line with the recommendations made by the Sheshinski committee he helped set up. This is a process he initiated and withstood the pressure generated by those behind the natural gas discoveries, Delek Group and Noble Energy.

Budgeting a revolution

On the other hand, there were several pressing issues where Steinitz could have demonstrated leadership and vision, but failed to do so. He didn't tackle the much needed reform in the electricity market (a topic that has been roaming the hallways of the treasury for a decade already). Steinitz avoided addressing the problems with Israel's ports, run by dock workers' unions that have earned their spot as the most militant and corrupt unions in the economy. He also didn't promote reform in the public sector, which is crying out for a shake-up.

In these areas it's possible and necessary to expect a finance minister to lead his country to take brave steps, but this would require capabilities that Steinitz lacks. He is incapable of building coalitions or creating channels of communications with all stakeholders. Steinitz also doesn't stand out for his ability to recruit top-notch professionals and nurture them.  Over the course of his tenure, many of the people around him, including Finance Ministry Director General Haim Shani, left before they had finished their full term. A lack of initiative by management in general, and in the treasury in particular, is interpreted as a sign of weakness that invites all kinds of pressures. Thus, instead of being proactive, Steinitz found himself on the defensive, pushing back fiscal demands that increased pressure on the public purse. The public tent protests could have been an excellent opportunity from Steinitz's perspective to enact significant changes. The tailwind generated by a public that supported structural changes was a rare opportunity that could have been utilized to formulate a vision for reducing inequality and social injustices. But here Steinitz decided to take the role of treasurer-accountant.  He was principally interested in knowing how much any proposed reform would cost him and how he would come up with the money.

In this role, Steinitz dealt with demand for social justice in terms of cost. The one question that he focused on was how to silence the protest. Steinitz lives modestly and isn't a dyed-in-the-wool capitalist. Under different circumstances, he could have identified with the demands of the protest and formulated a vision that would have differed from that of Prime Minister Benjamin Netanyahu, but the fear of breaching the constraints of the budget frightened him.

At the end of the day, Steinitz did free up some money for things like tax benefits for working parents and free education for children from the age of three. He also increased budget expenditures and the deficit and failed to implement the Trajtenberg Committee's recommendation to cut the defense budget by NIS 3 billion.

At some point during Steinitz's tenure, he fell in love with his role as tax collector, with a special passion for collecting indirect taxes. The froth in the real estate and car markets provided Steinitz with large revenue inflows during his time as finance minister. But he grew so addicted to these revenues that when it came time to restrain rising housing prices, Steinitz acted very slowly and only after the Bank of Israel had implemented several heavy-duty measures to handle the developing real estate bubble. The bottom line is that Steinitz repeatedly chose the easy solutions, like raising the gasoline tax, which was overturned by Netanyahu. The result was a finance minister engaged over the last two years in putting out fires and patchwork policymaking instead of demonstrating strong leadership based on a concrete vision.  

Tomer Appelbaum