The Politician Telling the Truth on Israel's Economy

Labor Party leader Shelly Yacimovich has presented the public with an economic plan and many people now see how correct it is.

In recent years, and perhaps even more so most recently, Knesset opposition leader Shelly Yacimovich, who heads the Labor Party, has come in for harsh criticism from Haaretz commentator Nehemia Shtrasler. He has argued in part that Yacimovich would dramatically increase government spending, cooperate with organized labor's major workers' committees and even expand the government's involvement in the economy.

In other words, he would call her a Bolshevik. But these are half-truths, divorced from their context, ignoring the personal leadership qualities that are essential to the success of an economic policy. As a result, the allegations are wrong and misleading.

First of all, Yacimovich is a rare kind of leader in Israeli politics. What she says is exactly what she thinks, and also exactly what she does. That's very unusual compared to our other national leaders. Such integrity demonstrates that Yacimovich has the two most important qualities that we need our leaders to have — credibility and a backbone to withstand pressure. That, by the way, is the exact opposite of Finance Minister Yair Lapid, who made dozens of promises and just after he was elected did just the opposite.

Second, contrary to what Shtrasler has said, Yacimovich is not an advocate of increasing government spending in a way that is unconnected to the state of the economy. I would like to mention in that regard that the change in economic policy — from one that places the emphasis on deficit targets to one that emphasizes levels of spending and their relation to the gross domestic product — was led by none other than myself, at the beginning of 2003. I was the one who fought for the policy change, explaining that it is only spending cuts in relation to GDP that would make possible expectations for reduced taxes. This in turn would boost private consumption, expand government tax receipts and in practice enable a reduction in tax rates, which will then boost private consumption and GDP in a recurring cycle of sorts.

Yet it was none other than that same Mr. Shtrasler, together with the senior professional staff at the Finance Ministry at the time, who attacked me in Haaretz for the purportedly nonsensical idea that private consumption could be increased by lowering taxes. To Mr. Shtrasler's credit, it should be said that, after that policy successfully brought Israel the longest and strongest period of growth in its history, he altered his economic views, and it is on behalf of those new views that he is attacking Yacimovich.

But since 2003, when the ratio between public expenditure and GDP in Israel was among the highest in the West, a lot has happened. The policy that was pursued managed to lower that ratio to levels lower than the Western average, to the point where they could go no lower without critically affecting public services (beyond the damage already inflicted) — services critical both to economic growth and to reducing economic inequalities. In other words, Mr. Shtrasler continues to adhere to a policy that for the past several years I myself have been explaining provides no major additional benefit and should be replaced by new economic policy guidelines.

On a concrete level, when it comes to government spending and taxation, expenditures cannot be reduced further relative to GDP as a means of cutting taxes. Instead the mix among taxes should be changed. Huge tax exemptions to major corporations should be stopped, particularly as provided in that foolish law for the encouragement of capital investment. Instead, taxes should actually be cut for the middle class and small businesses — the country's main engines of growth. Mr. Shtrasler is on one side of the divide on this issue while Yacimovich and I are on the other side.

Third, contrary to what Shtrasler has said, it was not Yacimovich who provided billions upon billions benefiting heavy-handed port workers' committees in exchange for the bluff of reforms for appearance sake. She wasn't even the one who provided billions more in guarantees to a collapsing Israel Electric Corporation instead of carrying out real reforms there. In fact, it was the prior government of Prime Minister Benjamin Netanyahu along with his current one that did so. On the other hand, Yacimovich is committed to use her standing as a defender of workers' rights to carry out genuine reforms that address efficiency and competitiveness at government monopolies. And when it comes to thuggish conduct (such as that of Ashdod port union leader Alon Hassan), she has not hesitated to come out against the committees with full force.

Fourth, contrary to what Shtrasler has said, Yacimovich is not seeking to increase government involvement in competitive segments of the economy, but rather to step up involvement, oversight and control over non-competitive sectors and ensure competition there through active involvement that will change the structure of these sectors. That's not Bolshevism but actually liberalism of the kind that Adam Smith himself would support. In fact, that guiding invisible hand was good enough to explain that free play will achieve optimal results only if from the outset those sectors are sophisticated and competitive, while if they are not at all competitive, free play will lead to exploitation of the little guy. That's exactly what is happening in the Israeli economy, which is characterized by very high degrees of a lack of competitiveness, and a regulatory void.

At the same time, I won't hide the fact that there have been and still are economic differences between me and Yacimovich, but she has influenced my thinking as I have hers, to the benefit of both of us. In addition, Yacimovich has presented the public with an economic plan and many people now see how correct it is. The plan can halt the organized assault that governments for the past 30 years have been carrying out against the middle class. This has involved more taxes, even higher prices for housing and basic services, and more cuts in social welfare services including essential services (first and foremost education and health) that would bridge the gap between the next generation of the middle class and weaker segments of society.

Yaron Zelekha is dean of the Faculty of Business Administration and head of the accounting department at the Ono Academic College, and a former Accountant General at the Finance Ministry.