How Will Israel Spend $300b in Revenue From Natural Gas Exports?

Israel's politicians have a moral duty to use the natural gas windfall to safeguard the future of our descendants, not dip into the pot to solve current economic ills.

In the battle to stop the export of Israel’s natural gas – the question being, should the tycoons be allowed to sell the gas abroad, or should the gas be preserved in the depths of the earth for our descendants’ use? – two main points have been forgotten. How much money will Israel make from natural gas exports? And what in the world does it intend to do with all that money?

With all due respect to our children and grandchildren, they won’t be able to live off the gas, but they will definitely be able to live off the money that will come in as a result of selling the gas, whether in Israel or abroad – on condition, of course, that the State of Israel considers those two points very carefully.

The first point – the money the state will receive from exporting gas – is supposed to be settled within the next few months, and depends on a complex formula calculating the export delivery costs. Allow us to draw the public’s attention to the formula. While it is less sexy than the battle against gas exports, it is at the very heart of that battle.

The second point is currently being addressed by the Knesset Science and Technology Committee, chaired by MK Moshe Gafni (United Torah Judaism), in the form of enacting a law for the establishment of a sovereign wealth fund for about one-half of the income from the sale of gas, to be invested for the benefit of future generations. Accordingly, the first order of business for the committee is to choose a name for the fund: the Future Fund; the Coming Generations Fund; or the National Fund.

The names being contemplated are an indication of the wealth fund's tremendous importance. It will safeguard the gas profits for future generations at the expense of the present ones, for two critical reasons. The first is the Dutch disease. If we allow the gas export profits to be turned into cash, we’ll create pressure to revaluate the shekel, which would deal a severe blow to the Israeli export market. Given that exports are the living heart of the Israeli economy, it makes no sense to damage them only because, out of the blue, we happened to stumble across natural gas. (The term Dutch disease was first used by The Economist magazine, to describe the catastrophic effect on manufacturing in the Netherlands after natural gas was discovered there in 1959.)

The second reason is the Israeli disease. If we allow all the gas export profits to become part of the current government budget, we’ll see a bloated budget, greater inefficiency, and the wasting of this tremendous resource on current consumption.

The experience of other nations that allowed profits to be translated into their budget has shown that they paid steeply. Their heads were turned by the sudden steep rise in their standard of living; they then experienced a painful crisis when gas profits leveled off, without ever having managed to develop alternate sources of income because of the dramatic changes and the Dutch disease. By contrast, nations like Norway and Australia avoided the mistake by establishing sovereign wealth funds to spread spending from their natural resources over coming years and future generations. In other words, the sovereign wealth fund is the new savings account Israel is opening on behalf of future generations.

However, this is an extreme depiction of the situation. In practice, current generations will still derive significant enjoyment from the gas profits. First of all, the taxes imposed on the gas profits – royalties and corporate taxes – will become part of the state budget. According to various estimates, this will represent about half of the gas income over the years.

In the next few years, we’re actually talking about all the gas income; the income from the taxes on the excess profits – which are supposed to go into the sovereign fund – will begin only in 2017.

Secondly, even the money going into the wealth fund for future generations will partially serve us too. This was the crux of the debate this week in the Knesset Science and Technology Committee: how to use the money in the fund.

The debate is obviously fundamental, because the estimate is that the sovereign fund will reach some NIS 10 billion within a decade and, if exports are allowed, will hit NIS 300 billion (!) by 2040.

There are two prongs to the question, the first being: What will happen to that NIS 300 billion in the fund? In principle, the state doesn’t intend to do anything with the money, instead simply leaving it in the fund.

This is precisely the reason the state has said it will be impossible to withdraw funds other than in emergencies, that an absolute majority of the Knesset (various proposals put the number between 65 and 80 MKs) will have to agree an emergency exists, and that, even in emergencies, the state will get the money from the fund only as an interest-bearing loan.

In short, the proposed bill is doing everything it can to make sure the money stays as a savings account – or insurance policy – for the State of Israel, just in case. By contrast, the bill’s second prong proposes that the current profits from the fund – i.e., the annual interest – become part of the government budget every year. At stake is an annual nominal dollar interest of 3.5 percent in the first 10 years of the fund’s existence and, afterward, the fund’s average long-term yield.

The bill doesn’t set any target yield for the fund, but one may assume it hints that the fund should strive for a long-term yield close to 3.5 percent, i.e., a higher yield than bonds, a yield that requires investing also in stocks, but still not at high risk. In any case, the money would be invested abroad, not in Israel, to ensure that the fund would be able to serve its insurance purpose. Its profits must not be linked to the situation in Israel, so it is not impacted in case of an emergency here.

The sovereign wealth fund will thus also contribute profits to the national budget on an ongoing basis, but to a limited degree, so as not to fall prey to the Dutch disease and avoid any temptation to waste the money now without leaving anything to future generations.

To the surprise of many, the Knesset Science and Technology Committee did not fold in the face of cheap populism, adopting instead the approach that the fund must be protected as much as possible in order to safeguard our collective future. 

Albatross
Tomer Appelbaum