Analysis |

Israel's Lucky Finance Minister Is Leaving His Successor to Be the Fall Guy

During his years in office, Moshe Kahlon spent generously on social programs and housing as tax revenues were rolling in, but that can’t go on

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Israel's finance minister, Moshe Kahlon, in a cabinet meeting, Jerusalem, November 18, 2018.
Israel's finance minister, Moshe Kahlon, in a cabinet meeting, Jerusalem, November 18, 2018.Credit: Emil Salman

When Moshe Kahlon took over as finance minister in 2015 he arrived with the reputation as a lucky politician. Three-and-a-half years later, he is going into elections with his reputation intact thanks to the absence of a single economic crisis during his term in office.

In fact, Israel’s healthy economy and its continued improvement since 2015 have enabled Kahlon to spend money on social programs that will put him in good standing with the voters.

They include increases in the minimum wage, expansion of the negative income tax program, and lower prices for water and public transportation. Kahlon engineered more government aid for Holocaust survivors and for young parents by increasing tax deductions and boosting subsidies for after-school programs.

Thanks to rising tax revenues, some of it due to a growing economy and some to a crackdown on tax evasion, Kahlon could have his cake and eat it, too.

On the other hand, he sometimes had to resort to playing games with the budget to cover the extra spending. Mechir L’Mishtaken (Buyers Price), his centerpiece drive to stem rising home prices, is being financed by marketing state-owned land at discount prices. The cost to the budget will be felt later.

Other expenses were covered by raiding the coffers of the Jewish National Fund and the Israel Lands Authority. Even so, Kahlon cut taxes rather than raise them and Israel’s national debt declined. Kahlon never had to contend with a major fiscal crisis.

The downside is that the lack of pressure enabled the finance minister to avoid undertaking controversial reforms that would have made the Israeli economy more competitive in the long run and better able to cope with challenges on the horizon.

Instead of taking on Avi Nissenkorn, the chairman of the Histadrut labor federation, Kahlon engaged in a bromance unusual in the historically stormy relations between the treasury and labor unions. Thus, in order to keep the support of the Israel Electric Corporation’s powerful unions, the cost of the signature reform of Israel’s electricity sector is being borne largely by the public

By the same token, Kahlon avoided entangling himself in the controversial issue of lowering the mandatory retirement age for women or taking a role in the natural gas framework deal.

Regarding the latter, Kahlon used his personal friendship with Kobi Maimon, a major shareholder in the energy company Isramco, to recuse himself from the wrenching debate over the gas industry even though he had promised during the 2015 elections “to end the natural gas monopoly.”

When it came to taking on cartels and vested interests, Kahlon chose not to repeat his performance as communications minister, when he brought down the price of cellular phone service by injecting competition into a sector once dominated by three companies.

The next person to take over the treasury will face growing risks, first and foremost the danger of a financial crisis spreading to the rest of the Israeli economy. He or she will also face a growing budget deficit next year. Far from being a lucky politician, the next finance minister may have thrust upon him or her the role of fall guy.

As Israel enters election mode, housing policy will be issue No. 1 for Kahlon and the voters. More than anything else, Kahlon has staked his reputation on being able to stem the rise in housing prices and help young families buy an affordable home.

In his early days as finance minister, housing was at the center of his concerns. He put the ILA and planning authority under the wing of the treasury. The government intervened in the housing market in ways that hadn’t been seen in years and at a cost to the economy of more than 5.2 billion shekels ($1.4 billion).

He became the first finance minister in a decade to see the seemingly relentless rise in home prices finally come to an end and even start coming down (albeit by a little less 1% in the last year).

Alas, the decline has come because fewer people are buying houses, which has deterred builders from starting new construction. The result has been a steep decline in housing starts that threatens to constrict future supply and reverse Kahlon’s achievement.

Kahlon’s Mechir L’Mishtaken attracted more than 137,000 applicants, but in the end less than a quarter of them actually entered the lotteries for the chance to buy a home at a reduced price. Also, contractors weren’t enthusiastic participants, especially outside the greater Tel Aviv area, and the Finance Ministry estimates that have the land auctions under Mechir L’Mishtaken failed to draw any bidders.

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