Lapid's Budget: Israel's Poor Stay Poor, While Its Rich Get Rich

That's how it goes, everybody knows; especially Finance Minister Yair Lapid, whose proposed state budget not only turns on his core middle-class constituency, it is also terrible in terms of economic analysis.

Should the 2013-2014 budget surprise us? Despite the public protest since Finance Minister Yair Lapid revealed his economic plan, the truth is he did exactly what we expected him to do. ‏

He did well by the upper tenth percentile − to which his friends, advisers and supporters belong − and passed on to everyone else the cost of plugging the hole in Israel’s national bank account. The fact that he told his voters something else is the problem of whoever chose to believe him.

If this were only about how money is distributed, the political rationale of the budget would hold water. People who aren’t happy with Lapid can vote for someone else the next time. But Lapid’s budget is terrible in terms of economic analysis. It unnecessarily compromises economic growth, it could cause long-term damage, and it does not take advantage of the extraordinary opportunity he and the state have been given to make bigger changes.

Lapid is taking money out of the pockets of the middle and lower classes, and is hardly touching the corporations, the wealthy or powerful unions. Raising VAT, for example, is regressive. While the middle class spends everything it earns on products and services, the wealthy only use some of their income, and the rest they put in the bank.

Focusing on income tax, VAT, child allowances and other clauses will mainly hurt the middle class; such measures don’t bother the rich, and the poor don’t earn enough income to be taxed. The finance minister did propose a change to pension ceilings that would affect middle- and upper-level incomes, and a change to the pension of Shin Bet security service and Mossad personnel − which was a scandalous 76% of their last salary.

However, he did not take much from corporations and their shareholders, from groups that have budgetary pensions or extraordinary conditions − the defense establishment for example, the Israel Electric Corporation, the Israel Airports Authority, the banks and the monopolies. Lapid rejected proposals to cancel tax exemptions, for example, on continuing education funds ‏(kranot hishtalmut‏), held mainly by people with means.

Companies like Teva will continue to pay single-digit or almost no taxes. As a result, this time next year we will see that inequality has risen again. This will spur on the transformation of Israel into a country with two main classes − rich and poor. True, that is the trend in most developed countries, but this does not mean that Israel has to lead it, as it does now.

Despite the cuts, treasury officials and Lapid’s advisers say the 2013 budget is 7% more than the preceding year, and that this is not European-style austerity. But that is not exactly the case. Even if total government expenditure is not being reduced, every shekel taken from people in taxes is a shekel that will not contribute to growth, and Lapid has chosen the worst taxes.

Benefits the state grants to a preferred sector immediately compromise the efficiency of the economy. Preference to high-tech, for example, means neglect of traditional industry. The law encouraging capital investments encourages the capital and the investments, but discourages work.

Lapid could have given incentives to work and not capital. He could have canceled the benefits given to groups in the past because they had the power to demand them. Lapid’s answer: he has only been in office for six weeks, he had to get the budget passed in 80 days, and he will deal with these issues in the future.

True, these inefficient mechanisms have been around for a long time; they are not Lapid’s fault. But Lapid should have zeroed in on them and changed them. The way it looks now, he is going to lose a rare opportunity.

Every shekel in the middle-class family budget is spent on goods and services, powering the entire business economy. The good portion of their money that the wealthy squirrel away does not help the economy grow at all. One example of preference to the haves is the National Insurance rates Israel’s employers pay, which is significantly lower than in other developed countries.

Prime Minister Benjamin Netanyahu shot down a recommendation by the Trajtenberg committee, issued after the social protests of 2011, to raise these rates to acceptable international levels. Increasing National Insurance payments by corporations and raising corporate taxes by 1% would save the treasury no less than NIS 3 billion, and make the rise in VAT unnecessary. But Lapid did not choose this alternative.

Sweeping taxes make people more prone to tightening their purse strings. That hurts the entire economy. Instead of imposing taxes on everyone, he could have imposed taxes on groups that have historically enjoyed inordinate benefits. But he did not, because it’s easier to milk unorganized sectors for more taxes than it is to fight the more powerful ones. He took the easy way out.

Lapid does want to cut the defense budget by NIS 4 billion, his advisers say. But the prime minister decides on that, and Lapid is not conveying the sense that the full cut is a red line for him. Cutting less, or nothing, from the defense budget will be another blow to the population, which will require more slashing and more taxes.

So far we haven’t heard Lapid say things like “Health is also security,” or “Work and welfare are also survival needs.” His lack of insistence on cuts into the exorbitant benefits of defense employees raises concern that more budget cuts are on the way. To judge from his choices so far, it seems doubtful Lapid will choose the better alternatives.
 

Rami Shlush
Ofer Vaknin