Wave of Price Hikes Gives Moshe Kahlon His Worst Week as Israel's Finance Minister Ever

Kahlon had one ray of light to savor: The Central Bureau of Statistics reported that income inequality has been getting better

Israeli Finance Minister Moshe Kahlon attends a news conference with Prime Minister Benjamin Netanyahu announcing the appointment of the new Bank of Israel Governor, in Jerusalem October 9, 2018.
\ RONEN ZVULUN/ REUTERS

The last week has been the most difficult ever for Finance Minister Moshe Kahlon since he took office in 2015. The wave of price hikes have been focused in the public sector – namely, electricity, water and municipal taxes. That, in turn, has given the business sector the freedom to raise its prices. After all, if the government is allowing itself to raise prices, why can’t we?

On the other hand, Kahlon had one ray of light to savor: The Central Bureau of Statistics reported that income inequality, as measured by the Gini coefficient, has been getting better. It’s not only getting better, it’s at its lowest in the past 20 years. The Gini index fell to 0.351 last year from 0.359 in 2016 and a record high of 0.390 in 2006 (on a scale of 0-1, with 1 being the most unequal).

There are many reasons for the decline, some of them connected with government efforts that Kahlon accelerated when he became finance minister. They include raising the minimum wage, expanding the negative income tax program and bringing more Haredim into the labor force (although the last year has seen the trend plateau).

Kahlon was also responsible for the cap on salaries of 2.5 million shekels ($660,000) for executives in the financial services industry.

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The good news on income inequality, however, is limited: Israeli still has the biggest gap of any developed economy and very high levels of poverty. To change that requires a big increase in the percentage of ultra-Orthodox men and Arab women in the labor market.

You can reduce income inequality with government allowances, but government policy over the last two decades has been to cut such allowances in order to encourage more people to get jobs. That has not only succeeded - it has succeeded at the same time that the unemployment rate is at a low of 4%.

Some people would argue that the jobless rate is misleading because it includes many people who are working part time. If they manage to stay above the poverty line, it’s just above the line and no more. The recent spate of price rises could undermine one of Kahlon’s chief accomplishments by pushing many of those marginal households below the poverty line.

The November consumer price index fell 0.3%, but it reflects the trends of the past. The next few months will show something different after decisions were made to raise prices for power, water and municipal taxes as well for many food products.

A discussion about how to moderate or roll back the price rise in the public sector, where electricity rates are due to go up as much as 8% and water rates by 4.5% starting in January, won’t help Kahlon.

He is trying to convince the Electricity Authority to avoid a rate hike, arguing that in 2021 the contract Israel Electric Corporation, the government-owned electricity monopoly, to buy natural gas from the Tamar field can be re-opened (the IEC is trying to re-open it even earlier). At that point it will be possible to lower the price IEC pays for gas by 25%, meaning rates for consumers will go down.

In the meantime the treasury is exploring ways to prevent the rate hike from happening in 2019 and compensating IEC for this in subsequent years’ tariffs. In other words, in 2019 the IEC will absorb the increase in costs and the following year, when gas is hopefully cheaper, rates will remain the same. If he succeeds, Kahlon will have moderated the price pain.

The problem for Kahlon with the inequality figure is that no one really cares about it. They do care about the cost of living. It can even spur protests as it did last week. Kahlon has no authority over electricity prices, but he may be able to use the protests to pressure the Electricity Authority.