Yair Lapid’s speech at the annual Herzliya Conference Sunday proved to everyone that he sees the position of finance minister as no more than a springboard to the really important job: prime minister. But even if this is only a pit stop along the way, he still has to succeed. In order to do that, he has to make difficult decisions and insist on the principles of economic theory – without falling into the trap of populism.
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Lapid is presently at a critical juncture that will determine his success or failure: Will he be a populist finance minister who is led by public opinion? Or a responsible one who works to promote the stability of the economy, along with growth and employment. Clearly, only a responsible finance minister deserves to run for prime minister.
A populist finance minister looks only at the short-term. He knows that the public hates tax increases but is indifferent to the size of the budget deficit. That’s why he will propose increasing the deficit from 2.5 percent of GDP to 3 percent – in order to avoid the need to raise taxes or to cut 5 billion shekels ($1.4 billion) in expenditure. And that’s exactly what Lapid is proposing.
Lapid knows that several business journalists will roundly criticize him. They’ll say that increasing the deficit is bad for the economy. Karnit Flug, the governor of the Bank of Israel, will say the same.
The business reporters will say that increasing the deficit means seriously undermining the integrity of economic policy, which is liable to end up with the lowering of Israel’s credit rating, an increase in public debt, a rise in interest, a decline in investment, a blow to the business sector, a decline in growth and an increase in unemployment.
But the finance minister won’t listen to those little nudniks. He will believe, like some of his predecessors, that he is stronger than all the laws of economics.
It is also surprising to hear that senior treasury officials are saying it’s possible to increase the budget, but only “a little.” They are willing to increase the deficit to 2.75 percent of GDP. A kind of destructive intermediate position. They say they cannot cut more than 6 or 7 billion shekels.
What a sad joke. Let them visit the private sector and learn how to cut expenses far more efficiently than the government ministries, which suffer from a surplus of manpower, duplication and endless waste.
Instead of giving in to Lapid’s pressure to increase the deficit, senior treasury officials should remind him that the need for budget cuts is a result of the “I have it” policy common to him and his predecessor, Yuval Steinitz.
You can’t pay for salary increases for teachers, highways, trains, settlements, Holocaust survivors, food security, the Jerusalem municipality, an exemption from value-added tax for first apartments, cancellation of the broadcasting fee and the Alaluf Committee (the Committee to Fight Poverty) without realizing that, ultimately, it will be necessary to cut back on other civic projects. And we still haven’t mentioned the demands of the defense establishment.
In any case, there are places where he can cut back. For example, we have to increase the absurdly low contributions for budgetary pensions (today, only 2 percent of wages), cancel the bridging pensions in the Israel Defense Forces, impose VAT on fruits, vegetables and on the city of Eilat, cancel the plan for “zero VAT” on apartments, increase taxation on shell companies (fictitious companies that have no activity, set up by high-paid salaried employees to avoid income tax and national insurance taxes), carry out a reform over manpower administration in the public sector, and raise the retirement age for women. And these are only a few examples.
Once, we had a Bank of Israel governor who would have put the finance minister in his place. He forced the minister to lower the deficit target for 2013 and 2014. But Stanley Fischer is no longer here. We have Flug, who says the right things regarding the deficit, but who has so little personal influence that nobody pays any attention to her.
So now there is no choice but to turn to Lapid himself and say: If you want to be prime minister, you first of all have to succeed in your present job. For that purpose, you have to abandon the false prophets – your political advisers – and listen to the true prophets who want what’s best for you – and for the economy.