Where Were You on Tuesday?

Where were you Tuesday night? Why didn't you come to the Prime Minister's Office, for the meeting on the budget and economic reforms? We didn't see you there.

Pity that you didn't come. You might have managed to change some of the decisions made there. They decided to freeze stipends for the poor, to raise the age of entitlement for unemployment benefits, and naturally to augment the defense budget by a vast amount -  which will halt or slow its drive to reduce the national debt. And, at the end of the day, it will make you and your children pay higher taxes.

Learn from the army people. They are deadly serious. Our sources at the cabinet meeting relate that the wide corridor before the Prime Minister's Office was wall to wall in khaki on Tuesday night.

No, they weren't there for interrogation about the mishaps of the Lebanon II war. Don't be naïve: the real war is over pay, perks, pensions and plumes.

The army and the Defense Ministry always win their bloody battles, meaning, over budgets. Most of the treasury's vainglorious plans to slash at pay, perks etc for defense were shot down at the cabinet meeting. What the defense minister and his director-general couldn't do, the generals in the hallways did.

Wall to wall khaki

This is what Page 30 of the Reforms Book submitted to government says.

"Defense Ministry workers receive unique extra pension payments that exist at no other government office, such as a security bonus and a combat readiness bonus. All the Defense Ministry workers receive these additions, although their jobs are not materially different from those of other civil servants? The security bonus adds 16% to 53% to the pay. The combat readiness bonus is equivalent to 32% of wages."

These bonuses cost the taxpayer NIS 105 million a year, calculates the treasury, and adds NIS 4,800 a month to the average cost per Defense Ministry worker.

And that's just the start. The treasury's book also discusses the Defense Ministry car fleet. It's the only ministry that runs a fleet of civilian cars costing NIS 67 million a year, with zero supervision, including by the treasury.

The treasury also notes subsidized life insurance coverage, dental care, full scholarships for the children of ministry workers throughout their first and second university degrees, and more and more and more. It comes to oh about NIS 13 million a year, but add NIS 5.5 million vacation pay for the ministry workers. No other ministry offers subsidizations like these.

We could go on and on, telling about the NIS 22 million budge for training and welfare, that no other ministry has. We could cavil about the NIS 180 million a year to send procurement delegations around the world, most of which is superfluous cost.

But we won't bother. All the proposed cutbacks have been canceled and if anybody has to pay the price, it will be the poor, as usual in Israel. They will bear the cost of preserving the corruption of the rich and belligerent.

For whom the shekel rolls

Naturally, not everything is black and rotten. The Finance Ministry did manage to push one important reform through on Tuesday night. The reform will expose the entire NIS 11 billion 'civilian part' of the defense budget. But we aren't popping any corks yet: somehow even the glare of the media often fails to stop the rot.

Treasury officials claimed this week that the budget for 2007 is a coup, and that the cabinet approved the most important of their reforms. But they know the truth, that it wasn't a coup, it was a rout, a smarting defeat after four years of the government slashing back its involvement in the economy.

But it is not all treasury's fault. The main responsibility falls on the prime minister, Ehud Olmert, who saw no problem with breaching the boundaries of government expenditure. The main responsibility is that of the cabinet ministers, none of whom got up and spoke out against the fiscal spree.

Bank of Israel governor Stanley Fischer is also responsible. He did not speak out against the government's intention of increasing the deficit and rate of increasing expenditure. He may be too preoccupied with the Wage Wars at the Bank of Israel, or maybe this imported official doesn't know the ways of Israel that well yet, where "one-time" means "in perpetuity". What starts as a one-time expense ends up inflating the national debt.

I can see clearly now, from here

Apparently you have sit thousands of miles away to see Israel properly. What the Prime Minister's Office, the treasury and the central bank didn't see last week, S&P could see clear as day. The agency published a short report on Israel, in which analyst Konrad Reuss expressed his opinion of the government's decision to increase its deficit to 3% of GDP.

Keeping the deficit at 3% over the years would moderately reduce the debt relative to GDP, which suits Israel's present credit rating, Reuss explained. But Israel's debt would remain significantly higher than that of its peer group, and debt that high reduces its fiscal flexibility, leaving Israel vulnerable to serious deterioration, a situation Israel barely escaped after 34 days of war.

Reuss did not tell us anything we didn't know. Israel's national debt is one of the highest in the world. It is the quantitative expression of all our economic ills: a gigantic public sector, high taxes, low productivity, low long-term growth, all of which prevent us from reducing our national debt to more normal levels.

When the economy is expanding, the national debt doesn't seem so onerous. But when the wheel turns, or an external shock jolts the nation, it suddenly looms as a threat to economic and financial stability.

The Israel Aircraft Industries

The prime minister received bakcing to increase the expenditure and deficit not only from the finance minister and Bank of Israel governor, but from the group of fat cats calling themselves our "economic leaders", who visited Olmert last month.

They sang the same tune as the Knesset members: by all means, one can increase expenditure on a one-time basis, in order not to hurt the weak.

And that is the biggest lie in Israel's economic debate.

There is no need to slash welfare in order for the government to meet its deficit target.

What the government needs to do is slash at the uppermost deciles; to hack away the flab coating the public sector.

On Wednesday we learned that the Israel Aircraft Industries is arranging for 2,000 employees to retire. Why? Did some vast project come to its culmination? No, no, a top source told TheMarker reporter Ora Coren that the IAI knows these workers are just stamping their attendance cards, and that's the end of their work day. The company has more than 2,000 workers who do nothing at all.

Last week the IAI published its financial statement for the first time in history. We finally knew how much those 2,000+ workers earn. Something like half a billion shekels a year. Half a BILLION.

How many slabs of flab like the IAI is the taxpayer supporting? A lot of them. The IAI's little sister, the Israel Military Industries, has cost the state NIS 10 billion in support from the start of the 1990s, to finance retirement schemes for workers. The Rafael armaments authority, which the media loves so much, has received NIS 7 billion in the last few years, also to finance retirement plans.

The taxpayer is spending hundreds of millions of shekels a year supporting people who do nothing at the IAI. The company now says that to dump these people will cost it NIS 2 billion. Whatever profit it had thought it make this year, and CEO Moshe Keret had waxes loquacious indeed about its profits each year, will be squandered on compensating these masses of workers who did nothing.