Israel is in a battle to keep its most-educated young people from emigrating to countries with lower taxes and better public services, and it must shape its policy accordingly, says the head of the prime minister’s National Economic Council, Eugene Kandel.
In an interview with TheMarker, Kandel, a renowned professor of finance who was born in the Soviet Union, says Prime Minister Benjamin Netanyahu has his finger on the pulse of economic policy and Finance Minister Yair Lapid is growing into the position. Kandel says the state must use both the carrot and the stick to encourage more Israeli Arabs and ultra-Orthodox to work, and into the labor market, and he believes giving Intel $1 billion to expand its operations in Israel is a good investment.
A key shaper of economic policy, Kandel has Netanyahu’s ear and his confidence. It is widely believed the top job at the Bank of Israel was his for the taking, but Kandel chose to stay put.
Kandel speaks freely, with no obvious concern for political correctness or stepping on toes.
You work closely with the prime minister on socioeconomic issues. Why is there an impression that Netanyahu cares only about Iran’s nuclear program?
“That’s not true. Do you think anything of significance could happen in the economy without the prime minister’s support?”
Remind us when Netanyahu’s government took any significant economic steps besides investing massively in infrastructure.
“What do you mean? Something super-significant happened with the infiltrators – we stopped the flood. We had the Sheshinski Committee, we had the Business Concentration Law and there is a huge effort that’s been under way for four years to solve the housing shortage. Having a uniform government policy on housing is a great achievement – the result of four years of exasperating work. And what about the prime minister’s resistance to pressure? Just imagine what would have happened had we surrendered to pressure from all types of interest groups during the social justice protest to raise government spending by 30 billion shekels.”
We don’t see the prime minister leading the way on the Haredim, but rather Education Minister Shay Piron and Economy and Religious Services Minister Naftali Bennett. We don’t hear him speak about Israeli Arabs.
“He is very involved in dealing with Israeli Arabs and works hard at it. Perhaps he says little about these matters because of the feelings of mistrust toward him, the incessant jabs and the preoccupation with the trivial details of the Prime Minister’s Office.”
Are you hinting about expenses for the prime minister’s home? In other words, it’s the media’s fault that the prime minister hardly talks about economic matters? Or is it the visionary leader from 2003 who has faded?
“In 2003 Netanyahu was finance minister in the midst of a huge economic crisis who only dealt with economic matters, and we certainly heard him speak more on those issues. Today he has another 300 things to take care of at the same time besides the economy. But it’s not that the vision has been lost. I see him working 17 hours a day and don’t understand how it’s possible to maintain his work pace.
“The prime minister led one of the most significant moves ever in Israel’s economy. He established a task force dealing with the civilian side like the one in existence on the security side since the Yom Kippur War. This strategic thinking couldn’t have existed without complete government cooperation and without the Prime Minister’s leadership spirit. This produced, for the first time ever, a socioeconomic assessment of the situation for the next 15 years, which has been submitted to the government.
“This is the most significant move being taken by the government today. And, when added to other moves such as the governance law [the Finance Ministry’s role in supervising the budget], civil service reform and the report on regulatory efficiency in Israel, the resulting process allows the government to be more cooperative, transparent and encouraging towards growth. That’s exactly the direction needed to be taken strategically.”
And how is our Finance Minister, Yair Lapid?
“He is still learning.”
Was that a hint about his lack of education?
“It’s not hinting at anything. Many cabinet ministers have no knowledge of the subject when appointed, and they learn. The finance minister has learned, and now has good command of the material. He is proactive and there is excellent cooperation between the ministries. Many measures are taken with the prime minister’s support, while maintaining the Finance Ministry’s independence.”
They have mainly cooperated in agreeing that cutting taxes is more important than raising government spending, even though Israel is ranked near the bottom worldwide in government spending.
“The data must be studied in depth. Our government spending is low because, among other things, we have a young population and because we’ve moved responsibility for pensions out of the hands of government.”
That still doesn’t explain why our social spending is significantly below the Organization for Economic Cooperation and Development average, while our poverty rate is nearly the highest.
“It was actually the incumbent prime minister who, at the time, increased government spending.
“The expenditure rule [the percentage increase in the state budget from year to year] was raised from 1.7% to almost 4% and has now been modified to 2.7% … and the prime minister also raised taxes despite his strong aversion to tax hikes – meaning he’s not an ideologue. He’s a pragmatist and makes decisions based on what’s good for the country at that point.
“Regarding social spending, remember we have a major challenge with Haredim, who are about 10% of the population, and Arabs, who are about 20% of the population, and who have little in the way of marketable skills and low workforce participation. These two groups have extremely low productivity rates … at a time when another part of the Israeli population has stepped up its productivity significantly. In other words, we’ve worsened the problems of poverty and inequality.
“The question now is what should be done. Heavily subsidizing the poor will strengthen the cultural and social trends of both these weak communities where work, initiative, children’s education and any desire for advancement are unnecessary. If there is cheaper housing, free medical care and allowances, essentially there’s no reason to make the effort to become productive.”
Are you implying that the Haredim and Arabs are to blame for their poverty?
“They’re not at fault. The government simply gave them the opportunity to be unproductive and didn’t give them the tools to integrate. Some weren’t forced and others weren’t given access. So now we’re trying to give them access to the workplace through an active labor policy – what the OECD has been recommending for years.
“We’re also seriously examining, under the direction of the Education Ministry, what can be done to improve the Arab school system. It’s not easy, because Arab children now must learn four languages – literary Arabic, spoken Arabic, Hebrew and English – and this make things very hard for them.
“We must ensure that Arab children leave the school system speaking Hebrew at nearly mother-tongue level, or they won’t be able to integrate into higher education or the Israeli labor market. And that’s just for starters.”
Cutting taxes is more important than raising spending?
“When we analyzed Israel’s strategic situation we noticed four main trends: low global growth, which should effect our growth too as an export-oriented country; increasing global competition for human capital; an aging population; and above all an increasingly global labor market – meaning those with the most potential attract worldwide competition and can choose to work in whatever country offers them the most.”
“It’s not just brain drain, it’s a young, skilled generation choosing where to make its home and maximize its potential. A Haifa Technion computer engineering graduate must now choose between staying in Israel and moving to Australia.
“The choice is based on what each country has to offer, including the public services that can be expected and tax rates.
So, limit taxes on the rich?
“Not the rich, but young people with high potential also look ahead to see what tax will be imposed on them in the future. You can’t ignore the fact that today 75% of taxes in Israel are paid by the top 10%, and if we drive them away there won’t be anyone to pay taxes.”
So, reduce taxes for people with high earning potential?
“We need to make everyone more productive and give everyone more services for less money.”
“By boosting efficiency and productivity, increasing competition and looking at the long term. We need to understand that there’s more competition now for our citizens and create a reality where an Israeli finds it better to live and produce here. We must be much more efficient in making the most of our human capital – we can’t afford to leave out women, Haredim, Arabs, the periphery or older workers. We want to push all these populations into the labor market.
“We also need to educate Israeli workers to be more open and flexible. Occupations are quickly vanishing in our age, so we need to give our workers the ability to continue creating value in any changing situation.”
How does this jibe with the huge benefits given to large, wealthy concerns through the Law for Encouraging Capital Investments rather than to individual taxpayers?
“There’s an underlying and mistaken assumption that if we canceled the law all the tax benefits to exporting companies would go into the government purse. This is likely true for some companies, but not for others, mainly the multinationals that would simply divert profits away from Israel. Let’s not forget that half of Israel’s exports are high-tech, and half of these are by multinationals, so we mustn’t chase them away. They must be taxed, but the rate must be globally competitive. We can’t help it, it’s a ruthless world, and we don’t really have a free hand in taxing the multinationals.”
We don’t have the freedom to examine the economic impact of giving a billion-dollar grant to Intel?
“Media reports about a decision to give Intel a grant without examining it first are false. Over the last year and a half we’ve worked jointly with the Economy Ministry on a model for bringing a strategic investor to Israel, one who will bring along the capability of enriching the country in knowledge and technology. This model is classified, but all our contact with Intel now is based on it.”
And this model shows it’s worth giving Intel a $1-billion grant?
“We are trying to establish a long-term relationship with Intel. There are many advantages from having Intel here – it provides us enormous tax benefits along with trickle-down know-how, jobs, Israel’s international positioning and more. There are an endless number of benefits, some that our model can’t even quantify.”
So the answer is “yes,” it is worth a billion dollars.
“The issue is in negotiations, with both sides taking a positive outlook.”
There isn’t anything better to do with a billion dollars? Why not invest it, for example, in encouraging innovation in traditional industries?
“One doesn’t rule out the other. Both must be done, as well as remembering that the benefit to Israel from Intel is very considerable and has been attained at a reasonable level of [financial] support. So there is no reason to claim that if we are stingy with Intel’s grant we can earn more on this money elsewhere.”
So we can continue living with a situation where most of Israel’s exports come from three huge companies that are also the ones receiving most of the benefits?
“I’m disturbed about the concentration in exports and something must be done to encourage more exporters. But the way to achieve this isn’t by chasing away big companies. Much progress can be made in helping small businesses or traditional industry using tools that don’t cost much, for example, by improving regulation. Our regulatory system isn’t smart: It uses force by passing down directives rather than encouraging industry to supervise itself.”