Defense Minister Can't Finance New Social Agenda, Says Barak

It will be almost impossible to carry out necessary changes without exceeding current budget constraints, Barak predicts.

The government has a historic opportunity to carry out real socioeconomic change that will make Israel a better place for all its citizens, Defense Minister Ehud Barak said in an interview with TheMarker. He said the cost of the transformation would run between NIS 40 billion and NIS 100 billion.

"I think it will require NIS 40 billion to NIS 50 billion over five years in a most limited version for the required changes," he said, adding that it would come to NIS 80 billion to NIS 100 billion if it were to more broadly address the demands of the recent wave of protests on social issues.

Ehud Barak.
Moti Milrod

It will be almost impossible to carry out the necessary changes without exceeding current budget constraints, the defense minister predicted. "It's very important not to exceed the budget framework. From a tactical standpoint, it's impossible to debate the issue without such a framework, which controls one's appetite. Then you have to provide an estimate for that critical mass that provides a response to the questions and how much it will cost," he said. If, however, it turns out that that critical mass that brings about change comes to sums that exceed the current budget, even if the Defense Ministry and other ministries do their parts to contribute, it will be necessary to look at ways to finance them from beyond the current budget, Barak acknowledged.

The defense minister said the necessary changes include addressing the cost of living and having the wealthy share a larger portion of the tax burden. He also mentioned integration of the ultra-Orthodox population into the workforce and attention to the problem of economic concentration in the hands of a small number of corporate hands as other issues requiring attention.

The immediate goal should be providing day care from birth to age three, Barak said, to be provided in the short term through tax credits for the cost of child care. In the long term, it will be provided through a network of day-care centers available to everyone, he said.

Among other steps Barak noted were providing a mortgage interest deduction for young couples apartments not exceeding a certain size, lowering the tax rate on poorer segments of the population and lowering the price of gasoline, electricity and water. He also advocated building tens of thousands of rental housing units, saying there were ways that the government could encourage rental housing.

Barak also advocated an increase of the monthly minimum wage from the current NIS 4,100 and the NIS 4,300 to which it is scheduled to be increased to in October of next year to NIS 5,000 as a way of improving the lot of the poor and the middle class.

Supports separation of finance and non-finance

On the issue of economic concentration in the Israeli economy, Barak supports imposing a barrier between holdings in financial firms and other companies as well as more comprehensive regulatory oversight to increase competition. "Monopolies are suppressing initiative and a sense of justice," he said.

There is a good chance that the money to finance the changes, Barak said, could come from increases in both state expenditures and state revenues, from increasing the deficit, which he said dropped too quickly, and from increased taxes. The government needs to consider these changes against the backdrop of changing conditions around the world and the recent wave of social protest in Israel, the defense minister said, and to decide whether it prefers to maintain the deficit ceiling or the country's social fabric.

Barak's proposals would again put him on a collision course with Finance Minister Yuval Steinitz, who objects to exceeding the current budget framework or increasing the deficit. The finance minister is also advocating NIS 2 billion to NIS 3 billion in cuts to Barak's Defense Ministry's budget.

For his part, however, Barak says under certain circumstances the budget ceiling can be exceeded. "There are a lot of reserves at the Finance Ministry," he said. Although he said he was not ready to spell out exactly what the Defense Ministry's contribution would be to the cost of the changes in social welfare policy he was advocating, he acknowledged it would be relatively marginal in light of the required sums involved. Any such contribution, he said, would come at the expense of the country's security, and the cabinet must decide what it is prepared to forgo in this regard to address social welfare issues.

Barak's stance on a variable value added tax rate also puts him at odds with the Finance Ministry. The defense minister is in favor of lowering the 16% VAT rate on some basic items and even to eliminate the tax altogether on others. On the other hand, he advocates increasing the tax on capital for high-wage earners, proposing a tax bracket for those earning NIS 80,000 a month, and another on those taking home NIS 150,000 a month. He said the corporate tax rate could be increased to 27% over five years, and he also said he supported purchase taxes and estate taxes.

If an estate tax of 10% to 15% were imposed for estates of more than a specific size, the wealthy would still not have an incentive to try to circumvent it. "It's a symbolic expression of how the state relates to the wealthy, who are not immune," he said.