Chief Scientist Warns Budget Cuts Are Endangering Israeli High Tech

Inbal Orpaz
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Chief Scientist Avi HassonCredit: Ofer Vaknin
Inbal Orpaz

Avi Hasson, the chief scientist of the Industry, Trade and Labor Ministry, has failed to win any significant budget increase for his office in the two years since he took over the job. But, he warns, the situation cannot continue because the high-tech sector is more in need of government assistance now than any time in the last decade.

While this year the OCS is expected to spend some NIS 1.54 billion, a slight increase over 2011, the overall trend has been steadily downward. Over the last decade, it has fallen by 40%, from NIS 2.2 billion to NIS 1.45 billion in 2011. As a result, Hasson has found himself, like his predecessors, at the center of criticism from two opposite ends of the spectrum: the companies and industries needing support on one side, and the Finance Ministry on the other.

"The OCS's budget is such that even the emergency storerooms are empty. This is no longer an issue of cutting the fat or of more efficiency, the demand for assistance [from the OCS] is five times what the budget is," Hasson told TheMarker this week. The office has wide-ranging responsibilities, from providing research and development subsidies to start-ups and bigger companies, to overseeing technology incubators. It provides funding for "old-industry" companies to upgrade their products and their manufacturing processes and serves as the main conduit for government aid to industry.

Even though Israel still spends a higher percentage of GDP on such aid than any other country, the gap is closing - and the government share in R&D assistance is below the OECD average. In fact, about half of Israel's civilian R&D spending is by foreign companies with local facilities.

"On the one hand, that's good and we are happy that most investment is by the business sector and that multinational companies see us as a good place to conduct R&D. The less positive side is that most of them operate only R&D centers here, which means that the output, employment and productivity potential is a lot smaller," Hasson said, adding that not only is there no money left in his budget, the "red lights are flashing." His budget is constantly being cut because it is so flexible, making it much easier to reduce when the treasury implements rounds of across-the-board budget cuts, he said.

"We need to harden the budget in order to broadcast confidence to the market and protect it," Hasson said, proposing that its s[pending be fixed several years in advance.

The kind of situation where the OCS can be the most effective, he explained, is when there is so-called market failure. One such case where the OCS is acting is to help make up for the increasingly difficulty for start-ups of sourcing venture capital and other private investment.

"We are seeing this very clearly in steadily rising demand for OCS funding because people have no choice," Hasson said. "Our principal problems today are in the earliest stages of a company, so over the last year we have been increasing efforts in this area."