Israel's Defense Budget Is Gorging on Cash Much Needed Elsewhere

Where's the money? It's lying about like dirt for them as know how to pick it up.

This is not a true story.

In late 2010, the defense minister and the Israel Defense Forces chief of staff held their weekly meeting. Ehud Barak and Gabi Ashkenazi had a lot on the agenda, most importantly – how to attack the Finance Ministry. In other words, how to squeeze it for as much money as possible at the expense of the Israeli taxpayer.

It's a matter of record that Barak supported an attack on Iran, while Ashkenazi was cooler to the idea. Their relations had become extremely strained, and not only because of Iran. But if they were in amiable agreement on anything, it was that the defense budget should be bigger.

The minister thought several billion more was the ticket to gear up for the Iran assault, and the supreme soldier also felt that the army could use the billions, irrespective of Iran.

At some point in their imaginary conversation, Ashkenazi pulled a rabbit out of his beret. "I have a paper here written by our financial adviser on the macro state of the economy," he said. "It shows there's a lot of money lying around because the Finance Ministry got its estimates all wrong."

In simple English, let's look at the big picture, which was that the economy was growing gorgeously, money was piling up in the state kitty and the time was perfect to loot the treasury. Because if the army didn't help itself to all that lovely lolly, the money would be squandered on piddling causes like education, health care or poor people on welfare. Or even just to reduce Israel's sovereign debt, God help us.

There's only one problem with our story (which reads like the ravings of a reporter who firmly believes there's no correlation between the growth of the defense budget and the actual threats to Israel; that the only reason the defense juggernaut grows is that it can). The problem is that our story is true. 

At least, the quote "there's a lot of money lying around" really was said.

The defense budget has almost doubled, growing by almost 100% in nominal terms since the second intifada broke out in 2000. The main change in the region has been that the political and economic models of most of Israel's neighbors have collapsed. The dictatorships are increasingly unable to siphon off most of the wealth for the clique at the top, leaving hundreds of millions of people mpoverished and hungry.

Even the rich oil states, some of which don't exactly see themselves as the bulwark of military opposition to Israel anyway, are feeling freedoms at the top erode. Tens of millions of people are mad as hell, and these countries have to spend more and more of their oil income on appeasing the masses.

In the rear with the gear

But the Israeli defense budget doesn't mention these things. In the opinion of the army and its abettors in politics, every development in the Middle East means exactly one thing: Israel needs to spend more and more on its defense establishment.

Two weeks ago, Haaretz revealed the true (staggering) state of spending on army pensions. It turns out that behind the mind-numbing phrase "actuarial liability for noncontributory pensions" (pensions for civil servants who set aside 0% of their salary in savings; their entire pension is paid by the taxpayer) lies a figure: NIS 260 billion. What's that figure? Israel's commitment to pay pensions to former servants of its defense system.

It turns out that 60% of the people who retire from the army (very few of whom saw combat) leave with pensions worth as much as NIS 10 million. That's five to 10 times the pension value of people 42 to 50 (which is when army personnel  retire) in the private sector.

To pay sky-high pensions like that, the state has to scrimp on health care, welfare, education and helping the poor.

The man in the street isn't privy to the way decisions are made at the top. He doesn't know the true considerations in budget allocation. He sees the waste every time he does reserve duty. But the underlying truths remain unknown because the army has a special privilege: It can operate in the dark, even when the issue at stake isn't national security.

Dealing with the army's robbery of the people is like dealing with economic concentration. Nobody wants to touch it. Those who try find themselves taking on a belligerent caste with tremendous power that has delegitimized the debate. Basically, it claims there is no problem. There is nothing to debate.

Just as top regulators (and journalists too) claimed three years that Israel had no problem with economic concentration and competition (only to change their minds), defense officials have been arguing that the NIS 60 billion defense budget for 2013, plus NIS 260 billion in actuarial liabilities (which we and our children will have to cover with our taxes over the next 30 years) is all because of the threats Israel faces.  It isn't because the defense establishment built itself a state within a state and barrels on with no supervision of its efficiency, priorities and pension terms.

Defense is a budget monster, and though it's the biggest, it's not the only one. These monsters have a knack for waiting until the moment is right, like an uptrend in the business cycle producing higher tax revenue. Then they pounce and take the money, at the expense of Israel's social needs. 

Worse, some of these monsters gorging on the money are actually in charge of Israel's welfare, education and health care. They know how to grab the money when times are good, but over the years it turns out they don't use it to improve services. It's money down the drain.

A poor excuse for democracy

Next to the budget monsters lurk another species of behemoth – the private and government monopolies. They don't pass their inefficiencies on to the taxpayer. They pass them on to the consumer. Moreover, these monopolies almost always prevail over the regulator, any regulator, concluded Shlomi Parizat, the outgoing chief economist at the Israel Antitrust Authority.

The upshot is that the structure of Israel's economy doesn't reflect democracy, if that animal even exists – maybe that's also a figment of our imagination. It doesn't reflect planning to maximize efficiency for the greater good. It's an arbitrary equilibrium reached by pressure groups.

Nobody wants to mess with these pressure groups because they're big, bad, nasty and well organized. And mainly, there are lots of fools out there being robbed blind without realizing it. They happily swing in the monopolies' defense.

The biggest mission faced by the new finance minister, Yair Lapid, is to defang Israel's strongest pressure groups one by one. That's what his brother in arms Naftali Bennett vowed to do when he declared war on the connected people in his first speech.

Lapid will face intense opposition from the 1% and 0.1% who are socially and commercially in bed with the decision makers, and who have accrued tremendous wealth not necessarily through their skills, but through sweetheart deals with the state. He will face opposition from well-oiled mechanisms within and without government, first and foremost the defense establishment. He will face opposition from the monopolies that have manipulated and cowed the regulator over the years.

His first port of call is Bennett, who last week became the first politician to decipher the biggest secret on the Israeli business scene, that there are two kinds of businesses: ones that create value, innovate and compete, and ones that take existing value (by borrowing money at sweetheart terms or manipulating the regulator) and build nothing.

The first type is characterized by perseverance, commitment and organizational culture. The second type is characterized by executives moving in a pack from one cocktail party to the next.

 Lapid's next station is the trial against former Bank Hapoalim chairman Danny Dankner. Last week Zvi Ziv, the bank's CEO during the Dankners' merry days at the bank, testified. "Since Bank Hapoalim's privatization, corporate governance has been deteriorating," he told us, without batting an eye.

Put otherwise, since its sale to private interests 15 years ago, Israel's biggest bank has been managed more and more like the private piggy bank of people near the trough.

And what did the regulator do about it? The treasury, the Bank of Israel, the press? They ignored it at best, or at worst, groveled before the bank's financial might, which serves the people who abet deteriorating corporate governance.

Lapid knows the people at Bank Hapoalim from the era of Dankner and Ziv, because he starred in the bank's ad campaign at the time. He probably had no idea about the bank's corporate governance; if he realized how Hapoalim was being run, he probably never would have agreed to represent it.

Now you're finance minister, Mr. Lapid. Take a look around you. Ask which large organizations are acting like Bank Hapoalim did then, as a former CEO attests.

And now think about whom you're appointing to key positions at the ministry. Are you putting in people determined to root out the culture of deteriorating corporate governance, to build a new politics? Or are you bringing back the old familiar faces, the people who have brought us nothing but misery?

AP