Economists: Budget Lacks Stimulus Provisions

Still, it's hard to deny that Finance Minister Lapid had limited room to maneuver.

On Sunday, the cabinet will discuss the 2013-14 budget, one brimming with austerity measures. TheMarker has asked three leading economists to comment on the document and their forecasts for the next year and a half.

Growth will slow further

Yaron Zelekha, the Finance Ministry’s accountant general from 2003 to 2007, now heads the MBA program at Ono Academic College.

“The new economic policy and the budget on which it’s based aren’t compatible with the state of the economy, and worse, they’ll deepen Israel’s recession so that it will be harder to get out of it.

“Passing the deficits created by the errant economic policy on to consumers and small and mid-sized businesses won’t encourage consumers or businesses to increase their economic activity − just the opposite. And being too trigger happy with taxes creates higher expectations for further tax hikes. Meanwhile, interest rates were left too low, so they will continue to fuel the rise in housing prices. All this has a harsh impact on private consumption, the main source of the current recession.

“Lapid’s biggest mistake was in not realizing that the biggest battle over the economy is being waged not on the spreadsheets at the Finance Ministry’s budget division, but over the public’s income expectations. The economy can’t be brought out of recession when the people are given to expect tax hikes, rising housing prices and price hikes on basic commodities like electricity, water and food, and when the finance minister, for the most part, refuses to fight the really necessary battles against oligopolies, big unions, recipients of huge tax exemptions and others.

“Lapid said that in two years the situation will be good. I don’t see one growth factor in his plan, only instigators of recession.

“The expected effect of the 2013-14 budget on poverty wasn’t presented to the public, the government or the Knesset, and not without reason. With 24% of the country’s population living below the poverty line, shouldn’t the important figure of how many more people will fall beneath that line because of the new budget have been presented to everyone?”

Lapid needs a fiscal advisory board

Eran Yashiv heads the public policy department at Tel Aviv University.

“Some people, including some of Lapid’s advisers, recommended that he prepare a budget for 2013 quickly to leave time to prepare a well-thought-out, solid budget for 2014 that would include vital reforms. The decision to go with the two-year budget left Lapid too narrow a window to work with.

“Under existing conditions it was possible to make cuts in the defense budget, public sector pay and national insurance allowances. Beyond that, he didn’t have room to maneuver.

“That isn’t to say that in Israel it’s impossible to increase budgeted government spending as a proportion of gross domestic product from the current 42%-46% ... while increasing tax collection rates, for example, through a major change in the Encouragement of Capital Investment Law. But major reforms take time − something Lapid didn’t have.”

Yashiv says he hopes that after the budget is passed, Lapid will plan real reforms, beginning with the 2015 budget. He believes Lapid should set up a fiscal advisory board at the treasury comprising the top experts from academia, business and government.

Cut defense spending

Hebrew University’s Michel Strawczynski heads the Van Leer Jerusalem Institute’s economics and society program. Strawczynski, who until last year served as deputy head of the Bank of Israel’s research division, thinks the government properly handled the constraints of the 2013 budget − a budget for only the last five months of the year.

“Due to time limitations, the economic targets set by the previous government for 2013 cannot be implemented. It’s impossible to cut the whole amount that needs to be cut in an entire year’s budget − NIS 14 billion − in the last five months of 2013; this is also true for the defense cuts, public sector pay, child allowances and the necessary tax increase.

“The main problem arose from the disproportionate tax reductions between 2004 and 2010. As a result, a budget hole amounting to 3% of gross domestic product was created, about NIS 30 billion in tax revenues. This is a structural deficit, meaning a continuing gap between revenues and spending, not a gap arising from the business cycle.

“The state budget deficit for 2012 and 2013 is structural, coming from those tax reductions. To bridge this gap, tax revenues needed to be boosted by 3% of national output. At the end of July 2012 the government increased the tax burden by NIS 14.4 billion, and in the 2014 budget it is increasing the burden by another NIS 13.3 billion. In other words, we’re close to plugging the hole.”
 

Olivier Fitoussi