PM Netanyahu Is Undermining Finance Minister Netanyahu

Netanyahu gets credit for rescuing the Israeli economy from the worst crisis in the country's history, and now he stands to take the rap for this decade's recession.

For better or for worse, the turning point of Prime Minister Benjamin Netanyahu's career came in 2003, when he was saddled with the appointment of finance minister in Ariel Sharon's government.

Netanyahu took up the thankless task amid the deepest economic crisis in the country's history (the downturn of 2002-2003 was more severe than that of 1966, even though it was the butt of fewer jokes), and he succeeded beyond all expectations. His decisiveness, courage and rectitude in pursuing unpopular but important policies succeeded in stabilizing Israel's economy. In retrospect, these moves also succeeded in buying Netanyahu a return ticket to the Prime Minister's Office. It is therefore interesting to note that the analysis of Israeli economic trends always begins with 2003.

There's no doubt that 2003 was a watershed, that the Israeli economy moved in different directions before and after that year. There also isn't any doubt that the rising tide of economic success generated by Netanyahu, the finance minister came to an abrupt half in 2009, when he became prime minister. Practically speaking, Prime Minister Netanyahu's government has managed to lose ground on most of the achievements of finance minister Netanyahu. It's certainly not something the prime minister can pat himself on the back about a year before the scheduled Knesset elections.

Let's be blunt: If Netanyahu rescued the Israeli economy from the worst crisis in the country's history, there's now a danger that he will be the one taking the rap for this decade's recession, which stands to be no less severe. And it will be his own doing.

The handwriting is already on the wall: Israel is expected to end 2012 with a budget deficit equal to 3.5–4% of Gross Domestic product (GDP). The official government target for 2012 is a deficit of 2% of GDP – that is to say, this year's deficit will be about double that which was targeted. It's the first time since 2003, the recession year, that Israel has overshot the annual deficit target.

But this time, unlike 2003, Israel has no excuses; 2012 is not a recessionary year. In fact, Israel is expected to end this fiscal year with 3.2% economic growth, much higher than that of the U.S., the EU and other developed economies. Moreover, 2012 follows two years of economic merrymaking – Israel finished 2010 and 2011 with dizzying growth rates of 4.6 and 4.8%, respectively. Despite this, the government's budget deficit in each of those two very good years exceeded 3%. In practice, the 2011 deficit was 3.3% of GDP, a small blip over the 3% target.

The prime minister has announced that the deficit target for next year, 2013, will be increased from 1.5% of GDP, as written in law, to 3%. This will make 2013 the fifth consecutive year (since 2009) that the budget deficit tops 3%, and the third year that the government exceeds the target set by law. In three of the four years between 2009 and 2012, the government also exceeded its debt target. All this is taking place alongside a positive economic growth forecast for 2013 – 3.5% for the year, exactly in line with the economy's long-term growth potential. Significantly, four years of good-to-excellent economic growth have produced large budget deficits.

We haven't mentioned 2009 till now, because it was an exceptional year characterized by an enormous deficit, 5.1% of GDP, that was impossible to prevent. 2009 was the year of the global financial crisis, in which Israeli growth dwindled to a measly 0.8%. In difficult years, there's no way to avoid budgetary excesses.

That's precisely why there's a government – to provide a security buffer during times of economic crisis. Paradoxically, fiscal 2009 can be considered an economic success: the budget deficit was not as large as predicted and economic growth, though low, was higher than predicted. This is what makes what happened after 2009 so worrying. Israel's excellent recovery from the crisis of 2009 has been blown away by the deterioration in Netanyahu's economic resolution.

Netanyahu's reputation as a decisive and courageous finance minister was etched into the public consciousness with provocative metaphors, like his call for placing the public sector, the “fat man” of Israel's economy, on a diet. Since then, the prime minister become flaccid, and is now only capable of reaching populist decisions – while neglecting Israel's future. Here we return to the trends that began in 2003. In its 2011 annual report, the Bank of Israel analyzed what it called the government's cyclically-adjusted budget deficit. In plain English, the central bank weighed the government's budget deficit against the state of the economy (was it a year of growth or recession).

Using this standard, it appears that 2011's cyclically-adjusted budget deficit, 3.3%, was actually larger than that of 2010. And that the 2011 cyclically-adjusted deficit was identical to that of 2003, that very same 3.3%. The inescapable conclusion: All of the nine years between Netanyahu's appointment as finance minister and his current position as prime minister have been wasted. We are back with the same deficit level we had then, even though 2003 was a year of deep recession and 2011 was a year of reasonable growth.

If that isn't convincing enough about Netanyahu's failure, it's worthwhile to closely examine the boasts of both the prime minister and his finance minister, Yuval Steinitz, who take every opportunity to pat themselves on the back about how Israel has succeeded in dodging the bullet during the global financial crisis.
The statistics, however, tell a different story. According to the Bank of Israel's analysis, when using internationally accepted accounting standards Israel's cyclically-adjusted deficit is 4.1% of GDP. The average cyclical budgetary deficit of fellow members of the OECD, the grouping of the world's most developed countries, is 2.8%.

There it is: The developed world, in the midst of the worst economic crisis in over 80 years, has kept its budget deficits lower than Israel's, even though Israel has had far higher growth rates. If that isn't called economic failure, it's not clear what is.