Lapid Must Cut the Deficit to Save Israel's Economy

The upcoming cuts will hurt, but they are crucial, for without them, Israel’s credit rating will be reduced, debt will increase, the bond market will tumble and interest rates will climb.

There are enough plans, revolutions and reforms hidden in the new coalition agreements to make one’s head spin, and there’s no way to know who’s responsible for what and what will happen next.

The ministers who assumed their new posts yesterday and are now sitting back enjoying their new ministerial perches seem certain that they will be able to deliver on all their promises − right here, right now.

But if they let their gazes stray for just a minute, they will find at the corner of their desks, right next to them, the demon called reality dancing with all its might and glaring at them subversively.

You can promise, write and announce what you want, the demon will tell them, but I’m here to inform you that the reality waiting for you just outside your door is far more difficult than you think. Awaiting you out there are the pressure groups, lobbyists, tycoons, labor unions and all those interested parties who benefit from the status quo − and they will fight you with every weapon at their disposal to block any change or reform.

So what should I do? the surprised minister will ask. It’s very simple: Focus on your main task and don’t try to push through everything at once. It’s important for you to succeed in your primary mission, because that’s how you’ll build yourself a power base, and only then, later on, will you be able to effect all your other revolutions.

If we start with the finance minister, his main task is to maintain a responsible fiscal policy, i.e., to lower the deficit and reduce debt. To do this, he will, within 120 days, have to pass a suitable budget for the years 2013-2014, a tough assignment that will require cutting NIS 20 billion and raising another NIS 10 billion in taxes.

These cuts are crucial, since without them the government deficit will exceed the 3 percent limit, and this will lead to Israel’s credit rating being reduced, increased debt, a tumbling bond market and higher interest rates.

To cut so deeply in the public sector, there will be no choice but to cut the defense budget, public sector wages, child allowances and allocations for infrastructure. There will be no avoiding the cancellation of all kinds of tax exemptions that distort the economy. That’s far more correct than raising taxes that will hurt those who want to work and invest, because such taxes will restrict growth.

This government was established in response to the social justice protests of Summer 2011. The protesters were members of the middle class who are buckling under the weight of low salaries, high taxes, the threatening cost of living and army and reserve duty.

They were the ones who brought the new forces of Yair Lapid and Naftali Bennett to the Knesset and the cabinet. Both their parties are also full of new, fresh faces who have not been corrupted and who owe nothing to anyone − not to any tycoon or to any labor union. They are accountable only to their voters. And now they have an unprecedented opportunity to improve the status of the middle class, through a series of important reforms that will accelerate growth and reduce the cost of living.

The most important reform is to increase competition by reducing tariffs and adopting international standards, so that food products can be sold here at normal prices. The second important reform must be in the realm of housing, to reduce the skyrocketing home prices.

One thing Lapid must not do is declare that the next budget will have “good news and additions.” Whoever hears those words will understand immediately that there’s money in the till and will double his demands, making the task of budget-cutting even more difficult. Lapid must tell the truth: That the next budget will be one of “decrees,” one that won’t allow doling out money to anyone for the next 18 months.

He could note that after the “seven lean years” there will be seven good years, and that there’s what to look forward to. But the reality demon will be on guard, and won’t allow him to tell us any tall tales.

Hadar Cohen