Taking Stock / Threats of 2005

That first sprint was impressive.

But the race is a marathon. It requires grit, constancy and a clear sense of direction. And remember, until now we have had a strong tailwind. But it could change direction at any time.

On Tuesday, the Finance Ministry published its State of the Economy survey and forecasts for 2005. The figures were known in advance. The treasury expects gross domestic product to grow by 3.8 percent in 2004, and sees GDP per capita increasing by 2.1 percent. The business sector is supposed to provide substantial impetus, with 5.3 percent growth.

Some of the threats to those rosy forecasts were mentioned in the treasury report, and some were not.

1. "One of the key assumptions is that the government's economic policy will comply with the economic plan compiled in 2003, and that its budget policy will meet the expenditure and deficit goals set for 2005."

That is an important assumption. But economists would call it ambitious. The greatest advantage the treasury had when building its 2004 budget was the pervading sense of panic back in the spring of 2003. That sense of urgency has almost entirely disappeared, which means that the cabinet and Knesset will be straining at the bit.

Finance Minister Benjamin Netanyahu, who is dying to return to the prime ministerial throne, has to drum it into the heads of his cabinet and Knesset colleagues, as well as those of the public, that the patient remains far from well.

That giant umbrella in the form of loan guarantees that the United States spread protectingly over our heads weakened the "discipline of the markets." Easy, cheap money from the Americans creates temptation to loosen the restraints. Without subsidized money, market discipline would have forced the policy-makers to behave responsibly.

2. Public consumption is not expected to contract in 2005 as it did in 2004, says the treasury. What will contract is public consumption as a proportion of GDP.

That is a disappointing goal. The government budget is still too bloated for the job to be declared done. Aggressive, ambitious goals are the stuff of success, especially when it has been proven that Israel's market is responsive to neo-Keynesian actions: Reducing government expenditure leads the business sector to expand.

3. The Finance Ministry foresees inflation accelerating around the world, including in Israel, next year. But it adds: "We may assume the Bank of Israel will not hasten to raise interest rates, despite the anticipated rise in American rates. It will allow inflation to reach the upper part of the target range."

That was a dangerous, superfluous thing to say. It is dangerous because Israel's experience in that respect has been miserable.

It was superfluous because the treasury itself says that short-term real inflation has been running at 2 percent in the last few months. That is half or a third of its level in the last decade. The only time real interest rates were lower was in the early 1990s, and we still remember the inflationary outbreak that followed.

4. The main growth engine in 2005, the treasury says, will be a 25 percent jump in exports, thanks to a rebounding global economy, a more efficient business sector, lower wages and depreciation of the shekel in real terms.

One of the reasons for the surprisingly strong economic growth this year has been the surprisingly strong economic rally around the world. Updated U.S. growth forecasts talk of 4.7 percent instead of 3.4 percent, which was the guess a year ago. Japan's latest figure is 4.1 percent instead of 0.9 percent a year ago, and in England, the forecast is now at 3.1 percent instead of 2.4 percent.

The only place where the forecast has not changed is the euro bloc. There, it is still at 1.7 percent.

But even if the trend persists, it is hard to see exports rising at the same pace in 2005. More of the much-vaunted growth will evidently have to derive from the domestic sector.

5. The treasury report neglects to mention the diplomatic process. Nor does it dwell on the disengagement plan as being key to growth.

One might claim that that the omission of the political element is due to the finance minister's political bent: Benjamin Netanyahu refuses to acknowledge a strong link between the security situation and the economy.

But Netanyahu did well to ignore the security situation. It would be a huge mistake to prepare a budget and economic plans based on diplomatic processes. One can achieve a great deal using nothing but economic tools. It would be a mistake to make everything hinge on politics.