Budget Slugfest Dragging Israel's Economy Down

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Netanyahu and Lapid at the Knesset, February 2014.Credit: Emil Salman

This is not an economic struggle here, but purely a political one. Finance Minister Yair Lapid wants to position himself as a champion of social justice protecting the middle class, while Prime Minister Benjamin Netanyahu is campaigning on the security ticket. The problem is that this struggle is liable to lead us into a financial crisis as early as the coming year.

The finance minister submitted a draft budget to the prime minister that has a deficit of 3.2 percent and a moderate increase of 2.5 billion shekels ($688.7 million) to the defense budget, without raising taxes and without deep budget cuts. Netanyahu is demanding a far greater boost to the defense budget of at least 6.5 billion shekels, which he argues is necessitated by the current security situation.

In truth there is no need for this. Our defense budget is already higher than the budgets of all the surrounding Arab states put together. Moreover, after Operation Protective Edge, our strategic situation has actually improved.

Lapid, for his part, is stubbornly insisting on implementing the zero-VAT plan for new apartments, although this will cost the state 3 billion shekels and won’t lower home prices; in fact, it will likely raise them. And while for some reason he doesn’t want to raise taxes, he seems to have no problem raising the deficit to dangerous levels. In contrast, Netanyahu is not prepared to let the deficit go past 3.2 percent, which is why he is prepared to make broad cuts to other areas of the budget.

Either way, the result is going to be awful. Because Lapid is not prepared to either raise taxes or make further cuts to civilian budgets, and because Netanyahu is demanding a hike in defense outlays, the solution in the end will be to raise the deficit to 3.5 percent, which is a dangerous level.

Moreover, it isn’t being accompanied by any meaningful reforms. There is no plan to cancel the VAT exemption on fruits and vegetables or on transactions in Eilat; no reforms planned for the Israel Electric Corporation or the natural gas monopoly; no changes to the Israel Lands Authority or to the salaries and management practices in the civil service; no plans to introduce pension contributions in the public sector for those receiving budgetary pensions, and no talk of raising the retirement age for women.

In other words, Israelis will end up suffering from a high deficit, which is poison for growth and employment, without enjoying any growth engines. The political dispute between Netanyahu and Lapid will drag Israel into a difficult financial situation in which its credit rating drops, interest rates go up, and the debt-to-GDP ratio increases, bringing higher unemployment in its wake.

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