Israel's Finance Minister's Capitulation to Populism

Moshe Kahlon is not one of those intrepid finance ministers of old, who knew how to take bold measures even when these were unpopular.

Israeli Finance Minister Moshe Kahlon briefing reporters at the Knesset on Monday.
Lior Mizrahi

Even the most extreme Knesset members didn’t believe it would happen. One of them said: “deep in my heart I had hoped that the finance minister would come and say let’s stop, let’s examine, let’s hold a discussion and think of all the implications.” But it didn’t happen. Moshe Kahlon overtook them from the left, wishing to make gains for himself. He wanted to be depicted as someone with a social conscience, forgetting his role as the guardian of Israel’s economy.

It happened last Wednesday, at a stormy and confused session of the Knesset’s Finance Committee. The topic under review was the salaries of senior bank and financial executives. At first, a reasonable proposal was introduced, stipulating a 3.5 million shekels ($900,000) cap on the annual salaries banks can pay top executives, with any excess not recognized for tax purposes. This would increase the banks’ outlays and induce them to cut their top salaries.

This proposal was adopted by Kahlon as well. But as we all know, as soon as the finance minister proposes anything there is no chance that Knesset members will agree. They’ll always want more. And indeed, they exerted pressure and Kahlon folded, with the cap reduced to 2.5 million shekels ($640,000), still a reasonable sum. But then, when everyone realized that Kahlon is a serial capitulator, two MKs, Zehava Galon (Meretz) and Shelly Yacimovich (Zionist Union), proposed an additional restriction on such salaries, setting the cap at 44 times higher than the lowest salary paid at any institution, including the salaries of contract workers. Kahlon, without investigating, studying the issue or consulting his budget division, approved this unrealistic clause in one short phone conversation, all because MK Miki Zohar (Likud) told him: “You’re socially-oriented, here’s an opportunity to do something big.” He did do something big – cause a lot of damage.

This is a move that goes counter to economic logic, capping salaries at an arbitrary level using a key that exists nowhere else, not in Sweden, France, Germany or the United States. Maybe it’s used in North Korea. This isn’t the same as intervention in taxation policies, which is legitimate and proportional. This is a politically-motivated determination of salaries which will not allow a smooth management of personnel in an institution. It flies in the face of the first principle of financial management – remuneration commensurate with productivity.

Let’s say a small bank wants to attract the CEO of Bank Hapoalim, Israel’s largest, since the board of directors sees him or her as the most suitable person that could save their bank. This CEO demands a high price for such a move. According to the new cap it won’t be possible to pay him or her and the move will be foiled, leading to the small bank’s collapse.

Israel’s Supervisor of Banks Hedva Bar said recently that she hopes a new bank is established here soon. But what investor would come here with this new restriction in place, one that doesn’t exist anywhere else? We’re already perceived as a country suffering from excess bureaucracy, one that persecutes its wealthy and in which it’s hard to conduct business.

Prime Minister Benjamin Netanyahu has said that he wishes to remove obstacles and loosen regulation in order to encourage foreign investment. Why is he maintaining his silence now that the opposite is being perpetrated? He knows that around 200 companies have already quit the stock exchange in recent years due to the burden of regulation and the hounding of businessmen. What does he want – the complete destruction of the stock exchange system?

We once had intrepid finance ministers. They knew how to take bold measures even when these were unpopular. We once had prime ministers who did not hesitate to confront Knesset members and finance ministers who pursued populist legislation. Today we have timid leaders who only worry about their media images. They conduct opinion polls and consult with endless media consultants before making any decision. What drives them is fear of what social media say about them and how they’ll look on the evening news.

And the economy? That’s the last thing on their minds.