Moshe Kahlon and Karnit Flug aren’t the first finance minister and Bank of Israel governor to clash over the questions of how to manage the economy. Most of Israel’s governments have witnessed tensions and outright confrontations between the country’s two top economic policymakers – and the fact is, the economy is better for it.
We shouldn’t aspire to complete harmony between the elected officials who are responsible for economic policy and the bank governors, who are charged with maintaining price stability and a sound banking system and for advising the government.
But nor should we treat the blowup between Kahlon and Flug last week after the central bank released a report critical of Kahlon’s housing and fiscal policies as business as usual and move on. This time the circumstances are different.
Flug is due to complete her five-year term as governor at the end of October, which naturally raises the question of whether she will be named to a second term. But even before this came up as an issue, those around Kahlon stated last week that another term was not going to happen.
Kahlon took the Bank of Israel’s criticism hard, especially the part on housing policy. But if you read the section of the report on the housing market, you don’t see any reason for Kahlon to be angry. The chapter includes a deep analysis of several key issues in the market, some of which praise Kahlon’s policies and some that were mildly critical.
There was certainly nothing in it that should have prompted Kahlon to issue threats. So what drove him to do so?
The issue of housing prices and bringing them down has been dear to the finance minister’s heart since he took office three years ago.
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He took responsibility for all planning policies and shook up the whole planning process, set up a national housing headquarters and revived the Mechir L’Mishtaken (Buyer’s Price) program. He also increased the amount of government land marketed to property developers and reached umbrella agreements with local authorities to accelerate major housing projects.
Kahlon expressed confidence at the start of his term that he could bring down prices, but as time passed, prices didn’t fall but kept on rising. At a certain stage he stopped promising lower prices and instead focused on the first-time buyers (young couples) who were realizing their dream of home ownership through Mechir L’Mishtaken.
Finally, four months ago, the market turned. Prices fell for one month, then for another one. In September-December 2017 they declined 2.1%, and Kahlon was finally convinced that his programs were at last doing the trick.
But even Kahlon knows that his achievement is fragile. The government has become deeply involved in the residential real estate market and in the process has created a bifurcated market on subsidized and unsubsidized housing.
The Bank of Israel’s survey of the market was professional and to the point. While praising the big increase in planned supply and Kahlon’s success in driving investors out of the market and reining in price rises, the bank also criticized Mechir L’Mishtaken and noted that many of those eligible had not exercised their rights.
It found that the quality of construction was poor relative to that in the private market, that some of the tenders failed because contractors weren’t interested, and that people looking to upgrade to a bigger, better home were being hurt by Mechir L’Mishtaken’s focus on first-time buyers. It also noted the high 6 billion shekel ($1.7 billion) cost of the program.
Kahlon wasn’t happy about the timing of the criticism. From his perspective, he had fought powerful forces – the building industry, the banks and low interest rates – and just as he is finally winning, the bank comes and snatches away his laurels.
Worse than that, the laurels are being taken off his head just when he most needs them.
If Kahlon were convinced that the next election will be in November 2019, when they are scheduled, he could have lived with the Bank of Israel’s critique. But he knows that Prime Minister Benjamin Netanyahu plans to move them forward. The sooner that happens, the fewer achievements Kahlon will be able to show the voters.
That was why he, together with Habayit Hayehudi leaders Naftali Bennett and Ayalet Shaked, pressed Netanyahu hard last month not to call a snap election. They all need time to show the voters what they have accomplished. For Kahlon, the Bank of Israel report undermines his case.
When he took office and appointed Shai Babad as his director general, he made a telling statement: “I don’t like to fight, but a finance minister has to know how to fight, so I appointed Babad. He’s bad and know knows how to fight.”
And so it has been. Kahlon refused to enter into disputes with the Defense Ministry, a traditional sparring partner for the treasury, nor with the Histadrut labor federation. But in the property market he did fight the contractors by moving much of their work into the framework of Mechir L’Mishtaken. For Kahlon, housing is something he is willing to do battle over.
The threat by Kahlon’s associates not to offer Flug a second term reflects the political pressure their boss is feeling. But removing Flug won’t change anything. The Bank of Israel report is written by scores of professional economists and they don’t take orders from the governor. If Kahlon wants praise from the central bank, he’ll have to replace all those professionals with lackeys.