Economists, Ex-treasury Officials Slam 2015 Budget

Spending package approved by cabinet last week criticized for lacking reform initiatives, measures to boost economy.

Finance Minister Yair Lapid and treasury officials present the 2015 budget, September 28, 2014.
Finance Minister Yair Lapid and treasury officials present the 2015 budget, September 28, 2014.Credit: Emil Salman

The government’s 2015 budget came under sharp attack Sunday from economists and former treasury officials, as the Finance Ministry’s top brass made an all-out effort to defend the package.

Critics, who launched their broadside on the first work day since the cabinet approved the 328 billion-shekel ($88 billion) budget late last Tuesday, before the Sukkot holiday, said it lacked any attempt at serious reforms or measures to help reverse slowing economic growth.

“It’s designed to advance the political needs of the country’s leaders, not the needs of the country,” said Momi Dahan, who heads the Federmann School of Public Policy and Government at Hebrew University. He termed it the “the most personal-political budget” that he could recall.

In particular, Dahan attacked the decision to go through with plans to exempt large number of home buyers from the 18% value-added tax, at a cost of 3 billion shekels in tax revenues, while failing to implement most of the proposals made earlier this year by the War on Poverty Committee.

The treasury is targeting a budget deficit of 3.4% of gross domestic product next year – bigger than the one officials had originally planned for, but one many economists doubt the treasury will achieve. Dahan accused the Finance Mi nistry of fudging forecasts for revenues and expenses, saying it was risking Israel’s credibility in financial markets.

“The size of the deficit is very important for a country like Israel suffering from rapidly changing geopolitical conditions,” Dahan told TheMarker. “The wider deficit and concerns about the credibility of the numbers [in the budget] makes a dangerous combination.”

Doron Cohen, who served as treasury director general in 2011-13, termed the 2015 spending plan “a bad budget.” Although he sided with Prime Minister Benjamin Netanyahu’s decision to increase defense spending by 6 billion shekels next year and Finance Minister Yair Lapid’s insistence that there would be no tax hikes, Cohen faulted the overall package.

“In past crises, the treasury knew how to rise to the occasion and undertake reforms and [major] changes to induce growth,” he told TheMarker. Unfortunately, none of those kinds of reforms exist in the new budget, nor was there any effort at ending tax exemptions, because no one wanted to take on the groups that enjoy them. It shows a lack of leadership and lack of responsibility.”

Cohen said the extra defense allocation could have been covered by giving up the zero-VAT plan and rescinding the VAT exemptions that already are in force on fresh fruits and vegetables, and on all goods and services in the resort town of Eilat.

Treasury projecting ‘weakness’

Boaz Sofer, a former deputy director at the Tax Authority, said Finance Ministry officials were projecting “weakness” in agreeing to such a spending plan.

“It’s proper that the finance minister makes the final decision,” said Sofer in an interview yesterday with MarkerTV. “Yet it seems treasury officials are being asked only to say things that are in accord with the finance minister’s opinion. I think that weakens the treasury and the economy, and does no one any good.”

Sofer agreed that Lapid was right to make a special effort at bringing down home prices, but said zero-VAT was the wrong solution. “Saying that economists aren’t the only ones who can make decisions is certainly correct, but in this case we have opposition from so many different parties. Perhaps he needs to listen,” said Sofer.

But Amir Levy, head of the treasury’s budget division, was adamant in an interview with TheMarker yesterday that the 2015 budget served the needs of the economy, and wasn’t simply a repeat of 2014 with extra defense spending tacked on.

“It contains important change, it addresses the issue of reducing poverty and social gaps, and it deals in a professional way with ministry allocations,” said Levy.

Over the weekend, treasury director general Yael Andorn defended the ministry’s economic projections for next year. She said the 2.8% economic growth the Finance Ministry is forecasting is in line with what private sector economists are predicting.

“The events that preceded the drawing up of the budget complicated matters because the Gaza operation changed the framework we had planned,” she told TheMarker. “In the end we reached a balance between the need for security, civilian needs, and the decision not to raise taxes.”

Meanwhile a report by the Israeli Institute for Economic Planning slammed successive governments over the last decade for failing to carry out fundamental reforms, causing worrying deterioration in the country’s educational performance, ability to innovate, create jobs and lower the cost of living.

“Since 2006, when Israel reached 15th place in worldwide rankings of competitiveness among 125 countries, we have suffered a significant deterioration,” said the report. “In contrast to conventional wisdom, which holds that the Israeli economy is strong and stable and that its infrastructure and markets are competitive and advanced, Israel’s competitive situation is poor and is getting worse.”

Among the areas where Israel is underperforming, the institute said, is government, which it termed inefficient. Bureaucracy is weighing more heavily than before on business, with Israel’s ranking for effective government falling 42 places to 109 among 148 countries.

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