Netanyahu’s Inheritance Is His Own Diminished Fortune

Netanyahu's economic policy was more about dodging bullets than identifying targets and doing any shooting itself.

The economic policy of Benjamin Netanyahu's last government was more about dodging bullets than identifying targets and doing any shooting itself.

His government never did have a social agenda, but when the 2011 social justice protests erupted, they set off a frenzy of policy measures, most notably free preschool education. Likewise, there was no declared policy of fiscal lenience, but when strikes by doctors and others broke out and public sector salaries were raised, the budget just grew. Nor was there any actual policy of fiscal discipline, but when the budget got out of control, Netanyahu sort of retrenched with last summer's tax hikes and spending cuts.

Yes, there was a strategy to this, but it was a political strategy, not an economic one, aimed at keeping the coalition from falling apart for as long as possible. It did last and putting off election day for longer than anyone had ever imagined four years ago.

Bibi was not the first prime minister to put electoral considerations ahead of proper economic management and he won't be the last. The unusual thing is that he has not had to pay any price for it.

Thanks to the small budget deficits and a current account in surplus he inherited from the previous government, the economy has stood rock-steady over the last four years while most of the Western world was shaken by the global financial crisis and multiple aftershocks. But Bibi ended his term with a whopping deficit of 4.2% of GDP and a current account that has slipped back into deficit. This time around, the task of overseeing the economy won't be as easy because the global economy is better off than it was four years ago, but it's still far from strong. Also, the inheritance Netanyahu is receiving is his own diminished fortune.

With what he has left, Netanyahu should focus on three things:

1. The budget: The economy is slowing and could use some of the fiscal stimulus Bibi frittered away in his previous four years. The only question he faces is how much austerity to impose.

The message that his finance minister Yuval Steinitz was sending that there would be no need for higher taxes was silly even by the standard of empty campaign promises. There's a nearly NIS 40 billion gap to close in the 2013 budget and that's before the coalition talks begin and the demands start piling up from potential coalition partners.

The conventional wisdom is that Netanyahu and his coalition partners are starting a new term and don't have to worry much about how much pain they inflict on voters because it will be a long time before they have to face them. Unfortunately Bibi's record of political courage is poor, to say the least. It's not hard to picture him succumbing to pressure from his coalition partners, the labor unions and perhaps by another round of street protests. Everyone learned it worked in his previous government; it should work again. The prime minister can tell himself he can be generous because the financial markets remain confident enough in him (just look at Israeli government bond prices, which rose over the last four years), and the rest of the developed world looks even worse by comparison. It's out of date, but he can always use Europe and America's sickly numbers to demonstrate just how well Israel is.

But how long can the false comparison go on? It is interesting to note that in its last report in September, Standard & Poor's praised Israel's "consistent growth and careful economic management" as reasons for retaining the country's A+ credit-rating even as the deficit was ballooning. "The political consensus for containing public debt remains intact," S&P gushed. But that consensus is under ideological attack and pressured by politics. Bibi's task will not be simply to reduce the deficit, but to turn the ideological tide back.

2. Housing: The goal of tamping down the rise in home prices has been left mainly to the Bank of Israel, which is using the only tools available to it, all involving reducing demand by limiting access to mortgage financing. But the real problem is supply. True, there are property speculators, but the real driver is real demand from people who need a roof over their heads. Their tolerance for the financial pain the central bank is administering is very high, for the simple reason that they have no other choice, and have little confidence in the ability of the government to solve the problem of rising prices anytime in the foreseeable future. Better to trap yourself in an expensive mortgage now and own a property than wait for an ever more financially painful future.

Only the government can increase the supply of homes. But the usual formula offered to do this increasing the sale of undeveloped land by the Israel Lands Administration won't work by itself.

There just isn't that much available land in the center of the country, where everyone wants to live. But making property available for residential construction in the periphery won't be enough if there is no parallel investment by the government in transportation, schools and other public facilities, and investment by the private sector in amenities like shopping malls, entertainment and office parks.

This is a tricky business. Politically, tackling housing prices will take protracted effort that's unlikely to show any payoff in the two-or-three-year time span by which politicians typically measure their success. Economically, there is a risk of either acting too cautiously and not creating enough new homes, or letting loose the supply strings and causing a market crash that brings down builders and mortgage-holders with it. The latter is the more likely outcome because once politicians start opening the cookie jar of more land and more infrastructure development, it's hard to close it.

3.Education: Like affordable housing, ensuring quality education is a favorite promise of politicians at election time. But it is also difficult to deliver because the results take even longer to achieve. This is unfortunately because in the long term, education is what will drive the economy forward or cause it to stall, but not in the way politicians typically portray it.

Quality schools are supposed to provide a feeder system to the country's high-tech industry, producing the next generation of engineers and entrepreneurs, or so goes the conventional wisdom. In fact, as lousy as it is, the system has been doing just that for the last few decades and probably will continue to do so. "Start-up nation" proves that.

But the educational system only serves the elite the few who go to the best schools or can overcome the system's deficiencies exploit the army's role as educator of last resort, or attend the best universities.

What is needed is a system that serves the rest of the population and can provide workers for the rest of the job market people who have the skill sets to fill the full complement of labor market needs of a knowledge-based economy.

Of course, the teachers unions are a barrier to reform. The large and growing Haredi population that refuses in principle to learn the core curriculum leaves a large kernel of the population bereft of an education.

It's hard to imagine the next government assuming it looks much the same as the previous one, which sees schools as a place to fight ideological battles over Zionism or religion taking the initiative either. But the real problem is that parents themselves don't seem to think education is a high enough priority to regard it as anything more than agenda item 8 or 9 during election time. Unless public opinion mobilizes itself, it is hard to see this government or any other taking action.

Nir Keidar
Michal Fattal