Israel's Finance Minister Needs to Stop Waiting for a Miracle

If he really wants to 'encourage growth' in Israel, there are three things Moshe Kahlon must do.

Nehemia Shtrasler
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Finance Minister Moshe Kahlon, May 18, 2015.Credit: Gil Cohen-Magen
Nehemia Shtrasler

Finance Minister Moshe Kahlon is worried. So is Prime Minister Benjamin Netanyahu. They can both see how economic growth is declining in Israel, and there’s no savior. The miracle they hoped for isn’t happening, and the state is losing 20 billion shekels (about $5 billion) of output annually.

On the eve of the Sukkot holiday, Kahlon presented a series of measures to “encourage growth.” One could have read it and died laughing – if it wasn’t about our child. Kahlon talks of offering guarantees to exporters (which is a problematic subsidy); of setting up a loan fund for small businesses (there’s nothing new there); of attracting multinational companies (that don’t want to come); and accelerating the connection of industry to natural gas lines.

That final remark is particularly infuriating. Connect industrial plants to gas? Great. Except due to the ongoing failure to approve the gas framework deal (which sets out new terms for the natural gas industry and would allow Delek Group and Noble Energy to begin development of the large Leviathan offshore field), the Tamar field is not expanding its activity and Leviathan hasn’t started. Within a few years there won’t be enough gas for both industry and export – so why connect the factories?

Before the March Knesset election, Kahlon promised he would tackle the gas issue, despite his close friendship with gas baron Kobi Maimon. After the election, he announced he wouldn’t touch it. Why? What happened? Is Kahlon not capable of putting his “friendship” to one side and dealing with the issue for the sake of the people? Really, the “friendship” is more important?

Maimon has shares only in Tamar, so approving a deal for the development of Leviathan would produce a strong competitor to Tamar, thereby lowering prices. In other words, approving the deal would be against Maimon’s interest. But Kahlon knows that approving the gas deal would result in an influx of billions of dollars in investments, which will lower expenses to industry and trigger economic growth. He even knows that developing Tamar and Leviathan will bring in hundreds of billions of shekels into the economy from taxes, which would go toward society and welfare costs. So what kind of socially aware finance minister is he?

If Kahlon really wants economic growth, he has to make the government more efficient and further reduce corporate taxes, lower the allocations made by employees to the National Insurance Institute, and lower property taxes for businesses. The tax burden is a decisive variable in any decision regarding new investment. If the taxes are too high, investors opt for another country.

Four year ago, a serious accident occurred in the field of fiscal policy and the tax burden, when three leading economists – Manuel Trajtenberg, Karnit Flug and Udi Nissan – persuaded the government to increase spending at a rapid rate. Following this, the government raised its expenditure, beginning in 2011, until it was left with no choice but to raise taxes. They started rising in 2012, and since then have only been following an upward trajectory.

In the past two years, the government has broken all records when it increased its outlay in the 2014 budget by 4 percent, and 4.4 percent in 2015. This represents a serious deviation from the (revised) fiscal rule that limits the annual growth in spending to 2.7 percent, and means that the fat (the public sector) gets fatter, while the thin (the private sector) becomes more emaciated. So why the surprise when investments are dropping and growth is dramatically retreating to an annual level of only 2.6 percent? (Netanyahu and Kahlon’s latest decision to lower the corporate tax rate to 25 percent is, however, a step in the right direction.)

Kahlon prides himself on being socially conscious. The truth is, he isn’t. A socially conscious finance minister must first of all advance the gas framework deal. He should streamline the government and enact difficult reforms. A socially conscious finance minister would lower taxes in order to encourage economic activity and growth. Otherwise, he will continue to wait for a miracle – and they only happen in fairy tales.