Netanyahu: Success in War Against Iraq Will Help Economy

On Monday, Finance Minister Benjamin Netanyahu unveiled his economic program for 2003. He has since been busy trying to sell it to cabinet ministers, MKs, the Histadrut and the public. As part of this effort, he has given several media interviews in which he stresses one simple message: The economy has been on a one-way trip downhill for the past several months, but the decline has been halted since the new government assumed power and now we are trying to achieve a 180-degree turnabout.

In a conversation with Haaretz a few hours before the United States decided to give Israel $9 billion in loan guarantees and $1 billion in defense aid, Netanyahu said that the Americans were favorably impressed by the treasury's plan.

"The Americans saw that the changes in the budget are serious and that we are planning significant economic reforms," he said. Furthermore, he added, the Americans are familiar with his record as prime minister and with his economic credo: a free market, cuts in government expenditure and privatization.

What conditions did the Americans place on this aid?

The Americans did not set any conditions. On the other hand, they don't want to give us money so that we can use it for transfer payments. Their motto is: We are giving them money so that they can help themselves. We will not support bad economics. But if they engage in proper economics, we will support them.

Was there any American response to the plan?

I spoke this week with Dan Kurtzer, the American ambassador to Israel. He told me: The plan is very interesting, very impressive.

And what if changes are made to the plan in the Knesset?

The Americans are not awaiting the benchmark of Knesset approval. But obviously, if there are problems getting the plan approved they will consider withdrawing the guarantees.

How much maneuvering room do you have in negotiations with the Histadrut?

There is a certain amount of flexibility in the budget. Not everything that appears in the budget book is written in stone. Not everything will necessarily be implemented immediately and in full.

Where is this flexibility? What are you willing to concede on?

I obviously won't detail where we are more flexible and where less.

Would you concede the pension reform to the Histadrut in exchange for the public-sector cutbacks?

No, we won't make concessions like that. The flexibility is more in the details. The direction and the processes are more important than the details.

What are the principles of the plan on which you won't concede?

The magnitude of the budget cut - NIS 9 billion. We set cost-cutting targets for all the ministries in this spirit. Obviously, we don't care if the ministers come up with alternative proposals for cuts as long as they behave responsibly. What do I mean by irresponsible behavior? If instead of cutting fat and making structural changes, they propose cuts in payments to widows, orphans and the blind. You know the routine.

How familiar are you with the program you signed off on?

Don't quiz me on what is written on every page.

There is a feeling that you haven't mastered the details, that you leave the details to [Minister without Portfolio] Meir Sheetrit.

I deal primarily with setting policy. But there are cases in which the details are important, and in those cases I do go into depth.

To a large extent, this plan was already prepared, by treasury budget director Uri Yogev and former finance minister Silvan Shalom.

I'm pleased that I found people in the treasury who share my opinions and my approach. For me, that was a pleasant surprise.

So what was your contribution to the plan?

Here and there I was actually a moderating factor, due to a realistic assessment of how much political maneuvering rooom I had.

So the Netanyahu plan is essentially the Silvan plan?

Part of the plan already existed ... To my mind, the plan's success depends on other factors besides its content. The plan's success depends on proper salesmanship. It is very important for the finance minister to get the public to understand the plan's logic ... The economic plan is part of my credo, my vision. I didn't receive my vision from the treasury, but I encountered my vision in many of the people there.

What is your vision?

I believe we lag behind the world because of our enormous public sector - not because of defense [spending]. Our economic system is problematic. It is a system in which a small private sector must carry an enormous public sector, in which a growing public lives off transfer payments - including many who view these payments as an alternative to working. There is the Israeli paradox of more foreign workers than unemployed Israelis ... And taxation levels in Israel are out of sight. Reducing taxes is one of the most important elements of the plan. It is important for the public to know that the maximum marginal income tax rate will be 49 percent - less than 50 percent.

Why did you support raising arnona [municipal taxes] by 5 percent? Arnona isn't a tax?

This was to correct a three-year-old distortion that stemmed from the real erosion in arnona due to inflation.

What is the deficit target in the budget you submitted to the cabinet?

The 2003 deficit target, as approved by the Knesset, is 3.0 to 3.5 percent.

The Bank of Israel estimated that an NIS 12 billion budget cut would produce a 3.9 percent deficit. You're cutting NIS 9 billion and talking about a deficit of 3.0 to 3.5 percent. How?

Our assumptions aren't static. We created a plan with many incentives for growth in 2003 ... If there is growth, tax revenues will rise, and then it is not unreasonable to assume that we will meet the deficit target set by law. But we are also dependent on the results of the war in Iraq. If the war creates a headwind, we will not be able to meet the deficit target. But if it creates a tailwind - if the U.S. finishes the battle quickly and there is no mega-terror - our situation will improve. This will give a strong push to the international economy; there will be worldwide growth; and Israel will benefit from this.

In other words, you don't promise to meet the deficit target?

We'll meet the target, but I don't promise.

That's not terribly impressive.

It's impressive because it's the truth. I don't believe it is possible to cut the budget any further. This cut represents the "minimax" point: It's the minimum that must be cut, and the maximum that can be cut. There's a limit to how much it is possible to reduce the standard of living and defense.

In 2002 the treasury promised to meet the 3.9 percent deficit target no matter what. Today you are evading a similar commitment?

I will do everything in my power to meet the target.

And if not, will there be an additional budget cut?

I do not intend to submit another budget.

And what will the rating agencies say about this equivocation with regard to meeting the deficit target?

Moody's recently decided not to lower Israel's credit rating. In practice, the markets are grading us every day, even more than the international agencies are. And so far, their verdict has been positive. On the markets, the price we have to pay for long-term credit has dropped significantly since this government was established - by 1 percent.

Does Bank of Israel Governor David Klein support the economic program?

The governor said he hoped the plan would be approved.

Will he lower interest rates?

I didn't ask him to lower rates and he didn't offer. Before I can demand anything of anyone else, I must make demands of myself: first to prepare a plan - and it is a good one - then to get it approved and finally to implement it. I believe the governor will be impressed by the plan's seriousness, by the work that went into it, and that once he sees that the cabinet has approved it he will act.

Will you be disappointed if the governor doesn't lower the interest rate for April next Monday?

I prefer to reserve my feelings for private conversations with the governor. As a rule, relations with the governor should be conducted in private, far from the public's gaze.

Is there room to lower interest rates?

There will be room to lower interest rates, if we take action with regard to this plan.

The prime minister is not backing you up.

He is, and our relationship is good. I wouldn't have taken this job without an explicit promise of full backing from the prime minister.

Then how do you explain his support for the defense minister's budgetary demands?

That was certainly not a unilateral step. There are limitations in life, and there's a limit to how much you can reduce the standard of living and how much you can cut back on defense. After all, defense is meant to ensure life itself. You also have to understand the course of events: The defense establishment had demanded an additional NIS 6 billion, and there were oral understandings and agreements ... It was necessary to balance their demands with the budget's capacity. From my perspective, it was very important that there be a clear agreement on a multiyear budget that would gradually decline - and this was achieved - and that a treasury accountant sit in the Defense Ministry, which was also achieved, for the first time since the establishment of the state.

Can the economy grow despite the security situation?

Terrorism hurts the economy, and our ability to affect this situation is limited. But if we devote our efforts to realizing the economy's potential - to removing roadblocks, to lowering taxes - there will be growth.

What kind of growth are you talking about?

A few percent.

In other words, rapid growth, of more than a few percent, will occur only if there is a peace process?

Rapid growth will occur only when the political-security situation changes.

Can you live with 12 percent unemployment?

Unemployment will rise this year because of the economic program. I hope it won't reach 12 percent. But in any case, we are now entering a difficult period, after which things will get easier. I prefer this to a situation of constant deterioration. I hope that people will understand that a certain short-term decline in the standard of living is preferable to collapse. And it is clear that if we had continued with the current economic policies, we might have found ourselves in the same situation as another country.


You said it.

We are heading toward Argentina's situation?

No. We have a big advantage over Argentina: We saw what happened to it. But we need to draw the appropriate conclusions.

You're saying this as preparation for the battle with the Histadrut.

I hope there will be an agreement with the Histadrut ... But if the Histadrut does not cooperate, we will act as we see fit - including by means of legislation.