Israel's Scorched-earth Finance Minister

Yuval Steinitz, with the help of his boss Benjamin Netanyahu, recklessly increased spending without raising taxes in parallel. Let's hope Yair Lapid can do better.

Nehemia Shtrasler
Nehemia Shtrasler
Nehemia Shtrasler
Nehemia Shtrasler

Strategic and Intelligence Affairs Minister Yuval Steinitz is currently in Los Angeles at a conference held by the Milken Institute. He's discussing the importance of investing in Israel, but he should be talking about an entirely different topic: how he, as finance minister, failed in managing the state budget, tipped the country into a huge deficit and left scorched earth behind him.

It has been a long time since we had to cut spending by NIS 18 billion, raise taxes by NIS 14 billion and still suffer a 3 percent deficit. That deficit is for 2014; for this year it will amount to a preposterous NIS 50 billion or so – 4.9 percent of gross domestic product. That's a lot more than what the economy can bear.

The primal sin committed by Steinitz and Prime Minister Benjamin Netanyahu was a new rule that let them increase spending at a faster and faster clip. And they did this without increasing taxes in parallel, because increasing spending is fun and increasing taxes is unpopular.

The other sin was submitting an irresponsible budget for 2011 and 2012, which included baseless expectations about higher tax revenue. And again, during those years the two increased spending way beyond the budget's limits.

Over two years the government has spent money it doesn’t have, signing checks without cover to curry favor with the people. For two years it ran an election economy that has blown up in the 2013 budget. If you demanded something, you got it. There were generous raises for the public sector, free education from age 3, subsidized afterschool programs and tax breaks for working men. The number of public-sector employees grew and funding was increased for the ministries, the ultra-Orthodox and the settlements.

And when it was clear at the end of 2011 that the situation was dire and the deficit huge, Steinitz and Netanyahu didn’t do what was necessary. They didn’t submit a plan for sharp cuts in 2012 and they didn’t raise taxes. They wanted to keep on being good guys because an election was on tap for 2013.

The best example of this is the Trajtenberg committee’s recommendation to grant free education from age 3 and fund it with a cut in the defense budget. In the process, the NIS 3 billion defense cut became a NIS 3 billion addition, so is it any wonder the well has run dry?

If this is the case, it's true Finance Minister Yair Lapid's inheritance is a tough one. But has he done everything to fix things? For 2014 it can be said (barely) that the plan is reasonable: harsh cuts, increased taxes and a 3 percent deficit of about NIS 30 billion. But for 2013 we have a huge failure. That 4.9 percent deficit is a mistake that could bump down Israel’s credit rating and hamper growth and employment.

When the new government took over in March, Netanyahu and Lapid should have come up with an emergency economic plan with cuts at the ministries, tax increases, wage freezes, a halt to railroad and highway projects, and an immediate cut to the defense budget. And now they should be taking harsher measures for 2013 so they can reduce the deficit, not increase it. Last year ended with a 4.2 percent deficit, so they should have planned a lower deficit for 2013, not a dangerous 4.9 percent.

But Lapid doesn’t want to be a bad guy. He's not determined enough and Netanyahu has his back. This is the same Netanyahu who conducted an irresponsible policy for two years and led us into the pit. Now he has to fix what he broke. Will he learn his lesson?

Yair Lapid taking over from Yuval Steinitz, right, at the Finance Ministry, March 19, 2013. Credit: Oren Nachshon

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