Former Budgets Head: Netanyahu Caused Protests

Udi Nissan predicts social crisis, over a year ago: "The tax policy needs to take into account public services. Continuing to reduce taxes could bring a high price."

Udi Nissan saw it coming. The Finance Ministry's budgets department head, who just stepped down after two years, predicted in February 2010 that the government's tax policy could lead to a social crisis, a year and a half before the crisis indeed broke out.

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Udi Nissan
Emil Salman

"The tax policy needs to take into account public services. Continuing to reduce taxes could bring a high price," he said at the time.

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That month, he also said, "The fast pace of cutting government expenditures has exhausted itself. We've gotten to a desirable level of expenditure, and the time has come to increase the budget." Furthermore, the smaller the national debt, the larger the budget can be, he determined. This enabled expanding the budget by NIS 5 billion for 2011 and 2012. For the Finance Ministry, this was a reversal after 25 years of looking to cut budgets, since 1985.

Yet Prime Minister Benjamin Netanyahu decided to ignore Nissan when it came to not cutting taxes.

"The prime minister's policy is wrong," Nissan says now. "You can't go on reducing taxes, because the government won't be able to provide services. People who live in a country with a GDP per capita of $30,000 a year expect a higher level of educational, cultural and health services."

Nissan, 43, stepped down last week, after a particularly short term at the budgets department. He has a doctorate in economics from Hebrew University and a post-doc from Harvard, and plans to return to that university to conduct research. He denies it, but people speculate he was motivated to leave by the feeling that he couldn't advance any more reforms under Netanyahu.

He gave his notice before the protests began. Once they broke out, he realized that this was an excellent opportunity for change, but it was too late to turn back, he says.

In many ways the protest is justified, he says. Netanyahu's policy is responsible for causing it, and he has several recommendations as to what should be done.

He recommends increasing corporate tax to between 27% and 30% - acceptable rates in international terms, he says - up from the current 24%. Nissan also believes the maximum income tax bracket should be raised to 48% or 49%, up from the current 45%, and wants capital gains tax raised to 25%, up from 20%.

Plus, a new tax bracket should be created for people who earn more than NIS 1 million or NIS 1.5 million a year, and the tax should be applied both to income from labor and capital gains, he says.

In addition, employers should be paying higher National Insurance payments - the current rate is one of the lowest in the world, he says.

Another source of funding lies in the Defense Ministry budget. "We can - and should - cut NIS 2 billion to NIS 2.5 billion from the defense budget," Nissan believes. "The defense establishment is far from achieving its efficiency goals."

That said, he thinks the protest movement should moderate its expectations: He objects to lowering VAT, in keeping with his general policy of not lowering taxes so that the government can fund services. He also says there's no chance of free daycare from age three months - there's no way to fund that. Plus, the education system just received a major boost from the two most recent reforms, which made it one of the country's top priorities, he says.

His biggest criticism for the protest movement is that it is not as universal as it claims to be - the protesters are looking out for their own interests, Nissan argues. This is exemplified by the college students, who are a main force behind the protest but aren't really suffering from the high cost of living, because most of them don't have children, he says. A good college education needs to be paid for and they know that, he says.

"The slogans about solidarity are great until the moment you're asked to give more. The middle class, which is demanding more for itself, is forgetting about the lower deciles," he says.

Unlike others, he thinks the division of resources within the government budget is relatively just, and doesn't favor particular sectors, he says. The ultra-Orthodox receive money because they have large families, not because of their religious beliefs, and conditioning various support payments on having a salary would increase poverty, he says.

Plus, contrary to arguments, not that much money goes into the settlements anymore, he says: "We invested heavily in the territories when we built infrastructures there. Nowadays we're not building new infrastructures, which means we're not investing too much there anymore."

The problems lie elsewhere - the powerful unions and uncompetitive sectors are two such places, he says.

He objects to the large unions, however. "The campaign against the big unions is a constant one. It upsets me that there are Knesset members like Shelly Yachimovich who defend them and who say it's fine that their workers are earning NIS 40,000 a month," he says.

He cites the port unions as a particularly egregious example.

"The most extreme example of a union that controls the country is the ports union," he says. "They get high salaries, and they also offer horrible service."

The unions limit the government's ability to be efficient, which necessitates privatizing government services. Despite the criticism, Nissan believes privatization is the right way to go, and notes that there are plenty of government services that function as poorly as privatized services.

"The problem is economic concentration, not privatization," he says. "We need to take each one of the less competitive industries and address them one by one." He's also not too concerned about the cracks appearing in some of the country's largest companies.

"Even if a big holding company collapses, I'm not afraid about the implications for the economy. Most of the holding companies are composed of lots of small, stable companies," he says.