So They Met. So What?

A meeting was held Sunday at the Prime Minister's Office to discuss the 2008 budget and the government's commitment to huge outlays in 2009-2012, but no decisions were made.

Finally, finally, the finance minister has woken up. Perhaps it was all the arrows fired at him, or the threatening numbers. Yet even now, nothing substantial has been accomplished.

True, a meeting was held Sunday at the Prime Minister's Office to discuss the 2008 budget and the government's commitment to huge outlays in 2009-2012, but no decisions were made. The deliberations will continue; the economy and growth can wait.

The 2008 budget is problematic with respect to both revenues and expenditures. There are excessive expenses due to generous decisions made by the government since the beginning of the year, alongside fears of lower tax revenues from the stock exchange (due to lower share prices), corporate taxes and income taxes (due to the anticipated slowdown in the economy). The budget therefore needs to be trimmed by NIS 1 billion in order to meet the expenditures target (1.7% growth) and the deficit goal (1.6% of the gross national product).

And that's just the beginning - because the government of Ehud Olmert is being exceptionally generous. Over the past two years the government has committed to many exorbitant plans in all aspects of life: educational reform, higher education, the defense establishment, the social justice plan, minimum wage, the greater Tel Aviv light rail, the Jerusalem light rail, the pension funds, financial aid for Holocaust survivors, multi-year plans for public works and the railroads, higher allowances for the aged, updating the health basket and hiring 1,000 more policemen.

The Bank of Israel's research department, headed by Karnit Flug, found that the total cost of the state's commitments for the next few years, plus the automatic increases in expenses from population growth, will be closer to 4%, rather than the legislated 1.7%.

The department analyzed two scenarios: one in which expenses increase by 4% and the other in which they rise by just 1.7%. Neither scenario was designated as preferable, which is a fundamental mistake stemming from the approach that the government must increase expenditures to deal with social ills. This approach assumes that the government is operating efficiently, with no overlapping expenses or wastefulness - a classic approach of an organization that lives it up on a bloated budget.

Flug's department does not state that if we increase public spending to 4% annually we will also sharply increase the financial risk to the economy. Public debt will rise to 80% of the GNP by 2015, which will lead to the downgrading of Israel's credit rating, higher long-term interest rates, a decline in investments, lower growth and higher unemployment - the worst social problem.

This approach also runs counter to Bank of Israel Governor Stanley Fischer's stance, which stresses the importance of meeting fiscal goals, particularly now, during a period of global financial instability. The moment Fischer tried to intervene, however, the research department objected, claiming it was being silenced and should have "academic freedom," even though it is not an academic body.

Not long ago this whole issue was discussed at the Prime Minister's Office. Fischer expressed his support for the treasury's positions, telling government officials that there is no point in considering changing the restrictions on expenses (currently fixed at 1.7%), if there is not budgetary discipline. He said there is no point in discussing a 2.5% increase when there is effectively already a 4% increase in the next few years.

The following day Olmert phoned Fischer with a promise that the government would meet the fiscal goals. For that however, a decision should have been made Sunday to trim the budget and cancel a large share of the grandiose plans for the coming years, and that did not happen.

Fischer recently concluded that an across-the-board cut is the right way to go, because the political system changed the priorities when the defense and education budgets were significantly increased. Now all the ministries can have their budget's cut by the same percentage and this will not affect priorities.

How much bigger will 2009's budget be? Fischer will eventually agree to a 2.5% increase, while national budget director Ram Belinkov will be pulling the other way, toward 1%. Finance Minister Ronny Bar-On wants to maintain the status quo, with annual increases of 1.7%. Let's hope that Belinkov wins.