Rosy by Any Other Name

All the Finance Ministry's forecasts have one thing in common - they are always optimistic, no matter who is finance minister or what the state of the economy is.

All the Finance Ministry's forecasts have one thing in common - they are always optimistic, no matter who is finance minister or what the state of the economy is.

The treasury will never issue a forecast saying, for example: "The economy is doing fine, growth is up and unemployment is falling, but next year we expect growth to come to an abrupt halt and unemployment to go belly-up." Take the current forecast from the treasury for 2002 - examples of the opposite tack can be lined up ad infinitum.

First it says this year, 2001, will see growth of only 1 percent, unemployment will rise and GDP per capita will drop 1.5 percent. But the forecast for the year 2002 is surprisingly optimistic. At the finance ministry, they understand that everything will change come 1 January 2002. Growth will jump to 3.5 percent, unemployment will drop, and everyone's standard of living will improve 1 percent. Now that is worth waiting for.

At the root of the issue it simply is too hard to be pessimistic or even realistic when you hold a government job. Let's take the forecasts of the treasury and the Bank of Israel a few months after the Intifada broke out. Bank of Israel governor David Klein said in December 2000 that growth in 2001 would reach only 3-4 percent. Today we would embrace that "only" with open arms.

Avi Ben-Bassat, the treasury director general, said at the same time that even if the troubles were to continue or even get worse, growth in 2001 would be brought down to 4 percent or even less. Ohad Marani, head of the finance ministry's budget department said he sees no slowdown in 2001, but he could see a warning light indicating slightly slower growth.

No one predicted growth of 1 percent. Topping them all was an economist, albeit form the private sector - Yaakov Sheinin. Back then he said the Israeli economy was on the brink of tremendous growth and the next four years would be the best in the country's annals. At the time, he did not grasp the significance of the Intifada.

These quotes teach us that one should treat forecasts with the greatest suspicion, even if they are the base for government policies. If the treasury predicts growth of 3.5 percent, it likewise improves forecasts for tax revenues, and each 1 percent of growth adds a further NIS 1.4 billion to government income. Now we can understand rosy forecasts.

Everyone knows the government will face difficult budget problems next year. There is increased spending on defense, wages and income supplements. At the same time, the Deficit Law obliges the government to reduce the budget deficit to 1.5 percent of GDP. Then everyone wants Finance Minister Silvan Shalom to spend more on infrastructure.

So how can the government satisfy everyone? There are two ways: Either change the Deficit Law, or come out with a rosy economic forecast so that the government can increase its spending without, apparently, increasing the budget deficit - or do both together.

Ohad Marani, the leading candidate for director general of the Finance Ministry, should be the one to tread most carefully, to understand the revenue issue. He should be convincing all the parties that are exerting pressure for increased government spending, whether by increasing the budget deficit - or by painting too rosy a picture.