Israel's Budget Woes Are Homegrown Blue and White

ANALYSIS: We need to improve our socioeconomic system to allow us all decent, long lives under existing budget constraints - and we can.

The prime minister and finance minister have come up with a new bogeyman: Europe.

Why are we raising taxes? Because of trouble in Europe. Unemployment is up? It's Europe's fault. Our economy is slowing down? Europe, obviously.

Have we become Europeans? Well, let's see: 34 degrees Celsius in July and 70% humidity, second-rate soccer, no subways in the large cities, paddleball and barbecues on the beach, shopping before takeoffs and applause after landings. That doesn't sound like Europe.

Europe is aging. The median age on most of the continent is 42-43, meaning half the population is older than that. And the population's aging process marches on because birthrates are low. More people will be living on pension benefits as fewer people generate savings. Baby boomers, who have already begun retiring, thought they could enjoy life with fat pension incomes and lots of free time to spend them. Now it seems their dreams are evaporating.

It turns out that Europe's extensive social benefits are mainly supported by borrowing. With growth potential fading, debt refinancing has become a problem and pension payments for retirees will probably need to be curtailed.

Western Europe's mature economy could have done quite well thanks to its developed social and physical infrastructure. But Europeans are trying to run it like an expanding economy, only to see it generate financial bubbles, meltdowns and debts.

The situation in Israel is different, with the median age 29 and higher birthrates, even among the secular Jewish population. Israel's economy is based on industries with growth potential, largely due to the technology sector, where Europeans trail.

One would think our situation should be much better, but is it? Not exactly. Much of the state budget goes where it doesn't contribute sufficiently to the economy and growth, like yeshivas, settlements, local wheeler-dealers and workers at government monopolies.

Israel boasts one of the lowest jobless rates in the OECD, but the employment situation in the ultra-Orthodox and Arab communities ranks among the worst in the developed world. And what about the revenue side? It's the middle class that bears the brunt of rising taxes and the growing burden of making ends meet - wage earners, the self-employed and college graduates who educate their children to work and contribute. Rather than taxing the rich, the prime minister and finance minister decided to raise value added tax by 1%.

VAT is a tax on consumption - where the middle class' income goes. The rich tend to have a lower marginal consumption rate, with every extra shekel in their pockets going toward savings, not consumption. VAT will therefore depress the economy.

Another way to increase revenue is by taxing the black market. After all, we don't want to share the dilemma of Mediterranean countries like Greece, Spain and Italy, where tax evasion threatens their economies. But we do want government cutbacks: Reducing ministries, cutting redundant jobs and bidding farewell to ministers without portfolio.

All these problems are homemade. They don't come from Europe: We produce them ourselves. We need to improve our socioeconomic system to allow us all decent, long lives under existing budget constraints - and we can.

Ran Shaham is co-CEO and proprietary account manager at the Altshuler Shaham Group investment firm. Yotam Ironi is a financial analyst. This article should not be construed as containing investment advice or recommendations regarding the purchase or sale of securities.