Wertheimer's Making Trouble

Eitan Wertheimer's popularity in Jerusalem circles is waning, fast. He created entirely too many problems for the paper-pushers in the capital.

Everybody laughing at them for approving a deal in which the billion dollars in tax that Iscar will pay gets offset by Iscar's savings on tax over a decade. Not only that, but the deal's timing is really inconvenient. Not a few government types are secretly praying that Wertheimer won't be able to close the sale of Iscar this year, but will have to wait until 2007 to get his $4 billion from Warren Buffett.

Naturally, the real problem in Jerusalem isn't Wertheimer: may Israel be blessed with many more like him. The real problem is with the politicians.

As the devil would have it, the biggest acquisition ever inked in Israeli history went down in a pretty good year, economically speaking. It is a year in which the government is wallowing in surplus tax income, which is expected to exceed the amount anticipated in the budget by NIS 8 billion to NIS 10 billion. And that's without Iscar. With Iscar, the surplus in 2006 could reach (Heaven save us!) anywhere from NIS 13 billion to NIS 15 billion.

Drat that Eitan

Heaven forfend, because there is nothing that causes the Jerusalemites to lose sleep more than a surplus in the budget. The bureaucrats know how to cope with budget shortfalls, but not with surpluses. It isn't that the "plus" symbol strikes them blind: it's that it makes politicians lose their heads. The first thing they do is set out to squander the money as quickly as possible (and as efficiently as possible vis a vis buying votes) before somebody else can get their grubby paws on its first (ditto).

If we were a normal country, the politicians might remember that 33% of the budget is earmarked for debt repayment. They would recall that NIS 36 billion, which is the second biggest expenditure after defense, is earmarked for interest payments in 2006.

If they were to make international comparisons, they would find that Israel's national debt is equivalent to a staggering 102% of GDP, compared with the average of 68% in the OECD nations. They would learn that each year, Israel earmarks 4.5% of its GDP for interest payments, compared with 1.5% in the OECD nations. In other words, Israel's burden of interest payments are three times bigger than the norm in the west.

The race is on

If the politicians were to study all that, they'd surely see that the best way to help their voters is by reducing the national debt, thus reducing the interest payments in years to come, years in which the state may not be running a surplus.

But the only thing that politicians study is the Channel 2 headlines. Reducing the national whatsit interests them about as much as tapeworm infestations among Amazonian bullfrogs.

The one that should shake them out of their torpor is the Finance Ministry. But the Finance Ministry, in terror of Eitan Wertheimer, is preoccupied with preventative measures, not in educating politicians.

The proposal to slash VAT from 16.5% to 15% is exactly a preventative measure. The treasury's counter-measure against politicians hastening to waste every shekel as fast as possible, is to propose a method to use every shekel as fast as possible to finance the proposal that's easiest for the politicians to understand. VAT is easy to understand, the national debt/GDP ratio is not.

That is how the treasury came to propose reducing a tax that is not progressive, after two tax reforms that already sharply reduced tax in Israel, and in a year when the economy is growing fast at that.

The anti-cyclical function of tax policy (lowering tax in lean years in order to stimulate economic activity, and vice versa) has broken down. Reducing VAT will spur consumption even more, in a year when consumption is rising anyway. Just look at what's happening to property prices in central Israel.

The Bank of Israel, which is responsible for monitoring and taming inflation, will be the first victim. That is one reason it isn't likely to appreciate the suggestion of slashing at VAT. And it isn't alone.

In private conversation, Jerusalem circles say it would be better to use the surplus to help the poor directly: negative income tax, for instance. Or, to help the middle class by changing the tax brackets. But mainly, the money should be used for Israel's future, for instance by lowering the tax burden. But if none of the proposals are popular enough for Israel's politicians, then there is always that bone to distract them, and one can only hope there will be enough money left to do what really has to be done.