Forecast for 2014: You Will Get Less

Israelis face higher costs on many fronts and will get less healthcare, less learning and fewer social benefits.

Hundreds of thousands of middle-class Israelis took to the streets in the summer of 2011 to protest the oppressive cost of living, a singular event in the country’s history. An alarmed Prime Minister Benjamin Netanyahu quickly established the Trajtenberg Committee, promising to follow through on its recommendations.

The committee was set up to help the middle and lower classes make ends meet by lowering the cost of living and boosting investment in infrastructure, education, health care and social services. Within two months the panel released its recommendations, which, while not revolutionary, included detailed proposals on rearranging priorities.

Less than a year later TV anchorman Yair Lapid took the advice of his well-heeled friends and ran for the Knesset. Not surprisingly, he recited the Trajtenberg Committee’s recommendations as if he had written them himself.

Two and a half years later it seems many lessons of the protest have evaporated. Many of the committee’s recommendations haven’t been implemented, and in the past two months the government even appears headed in the opposite direction.

In recent days Netanyahu and Lapid, now finance minister, have been candidly stating their intention to keep government small for the next few years and give the public less – less education, less infrastructure, less health care and less in the realm of social services. Their justification is that the government will also tax less – the opposite of what the Trajtenberg Committee recommended.

Netanyahu and Lapid’s favoring of small government was highlighted at Sunday’s cabinet meeting when the ministers adopted a rule to let the 2015 budget grow by just 2.6% rather than by 4% as previously planned. Tax hikes planned for 2015 are also being sidelined.

Now the government will provide less but won’t increase the tax burden. The budget will grow more slowly than economic growth, and any surplus will help reduce debt. The target for debt to gross domestic product is a very ambitious 50%, lower than the 60% set out in the Maastricht Treaty for joining the European Monetary Union. Meanwhile, revenues from natural gas production will be kept in a sovereign wealth fund for the future.

Netanyahu and Lapid are die-hard supporters of right-wing economics embracing small government. The ratio between the budget and GDP stands at 40%, the lowest for any developed country except South Korea. This means Israelis receive less from the public purse than nearly anywhere else. And since a larger share of Israel’s budget is devoted to security needs, the ratio of civilian spending to GDP is well below 40%.

The change to the spending rule will cut the budget-to-GDP ratio to 39%, according to the Finance Ministry’s budget department, but other economists say it will fall even lower. The Bank of Israel, adopting an independent stance from the treasury after years of toeing its line, says spending in 2015 will increase around 3% from the 2014 budget, but the treasury kicked off talks by demanding a mere 1.8% increase.

The new spending rule means the 2015 budget will grow by 8 billion shekels ($2.3 billion) less than previously planned. This follows two years of massive budget cuts accompanied by an unprecedented increase in the tax burden.

Always money for defense

As promised by Netanyahu and Lapid, defense won’t lose a dime from the switch to the new spending rule. The Trajtenberg Committee recommended a 2.5-billion-shekel reduction in the 2012 defense budget. Netanyahu accepted the recommendation and Eyal Gabbai, then director general of the Prime Minister’s Office and a member of the committee, was an ardent supporter of the decision. Yuval Steinitz, finance minister at the time, also gave it his full-fledged support and the cabinet went ahead with the cut.

Everyone knows the outcome. With Netanyahu’s backing, the 2014 defense budget will set a record high, even on an inflation-adjusted basis, after the treasury – with the Knesset Finance Committee’s blessing – supplemented it with 5.1 billion shekels.

Fully 54% of the 2014 defense budget, another record, will cover spending related to manpower rather than combat and military prowess in general. The 2015 defense budget will be even larger, both in nominal and real terms, so the entire 8-billion-shekel reduction in planned spending will fall, as always, on the civilian sector.

This 8-billion-shekel reduction is a heavy blow to what the Trajtenberg Committee proposed and follows many years of neglect – of education, social services, health care and infrastructure. As a result, the haves will find themselves paying for education, health care and social services out of pocket, while the have-nots will be forced to make do with the government’s increasingly inadequate services. There’s a name for this: privatization.

True, the government canceled the planned 1% to 2% income tax hike slated to take effect on January 1, but that’s a trifle. There’s a raft of measures the people will feel right at the beginning of the year. For instance, income tax credits and tax brackets aren’t being updated on January 1 as they are every year, which will mean another 900 million shekels for the government and a 1.8% erosion of wages.

Corporate tax rises on January 1 to 26.5% from 25%. Public transit fares are going up by 4.7%, hitting mainly the middle and lower classes. Transportation Minister Yisrael Katz has asked that the fare hike be canceled or postponed so as to encourage the use of public transportation, but his request was rejected.

That’s not all. Municipal taxes for 2014 are expected to go up by at least 3.4%, and electricity will cost several percentage points more starting in April, with how much depending on the electric company’s ability to get consumers to foot the bill for damage suffered during the mid-December storm.

Why isn’t the housing supply expanding?

Let’s not forget housing prices that, despite all the moves by the government and the Bank of Israel, will keep rising both for buyers and renters. The government, the prime minister, the Finance Ministry and the finance minister all forgot something out of Economics 101: When supply goes up, prices come down. Boosting supply was, for instance, how Ariel Sharon dealt with the influx of a million immigrants from the former Soviet Union and Ethiopia in the early 1990s.

Monday’s announcement by Lapid and Agriculture Minister Yair Shamir of a 1.1% price reduction for price-controlled dairy products and a 20% price reduction for sweet cream and white cheese is cold comfort to Israelis facing higher costs on many fronts.

While promising to look after the middle class in four out of every five of his sentences addressed to the public, Lapid’s track record shows the opposite. The man who rode the protest bandwagon into the Knesset and the cabinet helped Netanyahu all but eradicate the Trajtenberg Committee’s recommendations. And they’re both on track to wipe out the socioeconomic achievements of Israeli governments back to the very beginning – and that could be just for starters.

Oren Nachshon