Israel's High-tech Industry Is Going to Pay Big for Lapid's Budget Cuts

Instead of learning from the experiences of the past decade, Lapid is repeating the mistake Netanyahu made in 2003 - but this time, Israel can't allow itself another decade of stagnation in the high-tech industry.

It's been exactly 10 years since Benjamin Netanyahu underwent his trial by fire as finance minister and led the 2003 plan to save Israel's economy. That plan may have halted the financial crisis that was threatening to destroy our economy, and created a paradigm of financial responsibility. But 10 years later we can see the fallout.

One of the more serious effects is actually less visible. Israel's high-tech industry, which is still viewed as a growth engine, ground to a halt ten years ago. It hasn't been able to pull the economy along since then.

The Israeli high-tech industry has not grown since 2003. Its output may be growing in absolute terms, but it is no longer growing in proportion to Israel's total output.

More serious are the repercussions for the industry's manpower. The percentage of Israel's workers who are employed in the high-tech industry has stagnated, as has the percentage of university graduates completing degrees in engineering. What this means is that high-tech is no longer improving the quality of life in Israel the way it once was.

True, the stagnation started in 2001 when the high-tech bubble burst, but more than a decade has passed since then and high-tech has failed to become a growth engine again.

One of the main reasons that Israel's high-tech industry has been frozen in place is the gradual cuts to the Chief Scientist's budget. Whether via grants or R&D funds, or incubators for fledgling companies, the Chief Scientist is the government's main means of supporting high-tech ventures.

The Chief Scientist's budget peaked at NIS 2.3 billion in 2001, and since then has been gradually cut, hitting a low of NIS 1.4 billion in 2007. Since then the state has recognized that it needs to increase the funding, since this is an investment it knows pays off.

In 2012, the Chief Scientist's budget was NIS 1.6 billion, thanks to a NIS 500 million addition to the initially paltry budget of NIS 1.1 billion. Now, however, as part of the budget cuts proposed in Finance Minister Yair Lapid's draft budget for 2013 and 2014, the Chief Scientist is supposed to get only NIS 1 billion – the lowest sum in the past 13 years.

Perhaps the Chief Scientist's money could be used more efficiently, but it's clear that such a significant cut to the state's main means of supporting technological entrepreneurship will have very bad long-term consequences. Instead of learning from the experiences of the past decade, Lapid is repeating the mistake made in 2003 – but this time, Israel can't allow itself another decade of weakened high-tech.

Israel is now competing against countries like Taiwan, South Korea, Finland and many other nations that understand that supporting technological entrepreneurship offers very high long-term returns. Israel is no longer an innovator in this regard, so without significant government support, local high-tech will have trouble maintaining its position at the forefront of the global industry.

It's strange that a Knesset with so many graduates of the high-tech industry, including Economy Minister Naftali Bennett, Science and Technology Minister Yaakov Perry, Finance Committee member Erel Margalit and Agriculture Minister Yair Shamir, would repeat the mistake that we've been paying for over the past decade – and that we're likely to continue paying for in the coming decade as well. 

Eyal Tueg
Reuters