Taking Stock / Low Deficit - Good or Bad?

Who is to blame for the government's pathetically low budget deficit?

Preliminary estimates show the deficit running at a mere 1.2 percent of GDP in 2005 - a whopping NIS 12 billion below the target. How disgraceful!

This would be the lowest deficit the Israeli government has run in a decade, leaving aside the boom year of 2000, when sales of startups for eye-popping prices inflated the state's revenue from taxes.

One may wonder why a reduced deficit is cause for finger-pointing, not plaudits. One might think it grounds for former finance minister Benjamin Netanyahu to call another press conference devoted to the triumph of his economic policy over three years.

But in the era of "caring" politics, basic economic parameters take on captivating new dimensions. In the old economic lexicon, a small deficit would attest to responsible economic stewardship, low interest rates, flexible budget management, and strong domestic and foreign investment. In the new economic lexicon, a small deficit attests to exploitation of the poor by the rich. Hence the higher the deficit, the better-off the poor are.

NIS 35 billion

Let us revisit the economic ramifications of deficit.

Deficit is the difference between the government's spending and revenues. The government finances its deficit by borrowing. The loans bear interest and Israel's government is paying NIS 35 billion in interest each year.

Israel's national debt is among the highest in the world - about 100 percent of its GDP. This doesn't include ex-balance sheet loans, which include liabilities amounting to hundreds of billions of shekels for the pensions of civil servants and career soldiers. These pension payments have been growing at double and triple the speed of Israel's economic growth.

A high deficit, or expectations of a high deficit in the future, lifts interest rates. High interest rates are a boon to people with assets, mainly the rich. The ones who suffer are people with mortgages and overdrafts - namely, everybody but the rich.

Coupling a high deficit with a high national debt renders Israel's economy vulnerable to shocks. Just three years ago, neither Israeli nor foreign investors would finance the government's debt any longer, and interest on the shekel soared to 12 percent. The government had to brutally slash at transfer payments to prevent a financial meltdown that would have threatened the banking system.

The "caring" factions suddenly seem to think a high deficit is a cure for poverty. But the figures show that doubling entitlements and subsidies as happened in the 1980s and 1990s did not diminish the dimensions of poverty one whit.

After 20 years of the government trying to span the gaps between rich and poor with handouts, it turns out that the system didn't work. The private sector couldn't keep financing it over time. A fundamental economic solution was needed.

The low 2005 budget deficit will force the Finance Ministry and Bank of Israel to rethink deficit targets for the years to come. They should take advantage of the low deficit to reduce Israel's national debt. Investment in education or support for the weak should be financed by hacking at flab in the public sector.

Israel is not the United States, which can afford to run gargantuan budget deficits because of America's unique economic status. At present, we are being supported by U.S. loan guarantees. When they end, we shall have to comply with international economic parameters again - all by ourselves.

Running a low deficit in 2005 is good news for Israel and its economy. It is a great opportunity for us. With responsible economic management, guided by long-term strategy, the government could reduce both its deficit and its debt in the years to come, thereby freeing up budgets for helping the poor. Adopting low deficit targets would help the economy exploit its growth potential and make economic policy more flexible.

People who preach that high deficits are the way to narrow social gaps, or to tackle poverty, are refusing to acknowledge the basic laws of economics. They are willfully blinding themselves to the lessons of economic history.