In a few days from now Santa Claus will leave his residence in Lapland, board his sled, and set out with his reindeer to distribute gifts to the world’s children. Here in Israel we aren’t waiting for him. Even before Christmas some economists are urging the finance minister to behave like Santa.
Those economists, professors Zvi Eckstein and Benjamin Bental, are saying that Israel should increase its investment in infrastructure in order to create fast economic growth. But where will the money come from? No problem: increase the budget deficit. And that’s reminiscent of Santa Claus. Creatio ex nihilo. After all, there’s nothing easier than taking loans and increasing the debt, while ignoring the destructive effects of such a step, which led us to serious crises in the past.
The two economists suggest an impressive and attractive list of projects. Who doesn’t want a hospital near his home and a railroad that will take him to every corner of the country? But in that case, why hasn’t all this bounty been included in the 2022 budget, which includes a massive 452 billion shekels ($145 billion) in spending?
The answer is that behind economic theory lies political economic theory. The budget is divided based on political power. Larger sums of money go to those who have more power. Therefore, the moment that the deficit framework is breached, as the two economists propose, and reaches a frightening 6.2 percent, the extra money, about 35 billion shekels, won’t go to the important projects they propose; it will go to the defense budget, to public-sector salaries, to the settlements, and some to the political parties too.
That’s what happened in the past, and that’s what will happen this time too. After all, a highway doesn’t shout and a railroad doesn’t demonstrate. They have no political power. In addition, the moment the deficit grows and the debt soars, the rating companies will lower Israel’s credit rating, and then interest rates will rise, national investments will decline, and growth will suffer. More debt also means more expenditures on interest, so that less money is left for education, health, welfare and investments. Just the opposite of what the two economists want.
The two professors are not aware of the great risk that increasing the deficit and the debt entails. But fortunately, for many years Israel has had responsible finance ministers who made sure to reduce the deficit – so that on the eve of the COVID-19 outbreak, we had our debt-to-GDP ratio down to 60 percent. This enabled the treasury to provide massive assistance to businesses and individuals, totaling a huge 160 billion shekels, by increasing the national debt and without causing the economy to collapse.
It is also worth noting that the credit rating agencies did not lower Israel’s sovereign debt rating in 2020, because they believed that after the difficult year, during which our deficit jumped to a massive 11.6 percent, there would be a finance minister who would make vigorous efforts to reduce the deficit. That’s what happened in similar cases in the past, and that’s what’s happening today as well. That’s our reputation, and we mustn’t damage it.
- Rein in Lieberman before he brings down Israel's government
- The man who ended the Netanyahu era – and it's not Naftali Bennett
- Goodbye to Israel’s worst-ever finance minister, hello to Avigdor Lieberman
It’s also a fact that the present policy of reducing the deficit has proved itself: It raised confidence in economic stability, left more resources for the private sector, increased foreign investment, and in doing so led to a decline in unemployment and an increase in growth to an impressive 7 percent!
We also shouldn’t forget that we still aren’t out of the coronavirus crisis. Prime Minister Naftali Bennett is talking about imposing new restrictions, and we have to safeguard the reserves in case of new lockdowns and a need to compensate businesses, such as those in the tourism and airline industries.
Therefore, instead of calling to increase the deficit, which is the simple solution, Eckstein and Bental would do well to adopt an entirely different solution – to go over the present budget with a fine-toothed comb and find all the duplications, excesses and wastefulness, of which there is a great deal. And then they should conduct a public campaign to reduce this wastefulness. The billions that they save could be channeled into investments in the projects they are proposing. In that way we will gain twice: The deficit won’t increase, and investments will be made.
But that’s a difficult solution. Not at all in the spirit of Santa Claus.