The Bottom Line / You Set the Scene, We'll Do the Rest

The Israeli economy got a shot in the arm last week when Standard & Poor's upgraded the country's debt outlook.

In its explanation, the rating agency cited the government's successful stand on the budget deficit, the economy's renewed growth, the significant improvement in the balance of payments and the chances of restarting the peace process. Standard & Poor's economists pointed out that growth this time was more balanced, because it was not based only on growth in exports, but also on a recovery in local demand, that is, in private consumption and investment.

Accountant General Yaron Zelekha particularly liked that bit of the report. For some time, he has been trying to lead the "private consumption revolution" in the economy. Zelekha, with the best of intentions, says that growth based on private consumption is preferable to export-led growth, because increased private consumption creates more places of work throughout the country, in trading and services.

Growth rooted in private consumption is widely accepted in the U.S. The problem is that we aren't the United States. There they have enormous imports and exports, but they are between the 50 states that make up the nation, and so that trade is called "private consumption."

Conversely, what growth in private consumption in Israel really means is increased imports - and that means creating a deficit in the balance of payments, bringing in its wake crisis, depreciation and inflation.

And there's another big difference between them and us: the whole world is ready to lend to them, always, even when they are mired in vast deficits in their balance of payments. That's not the case for us. We still recall the crisis in June 2002 when we couldn't borrow one dollar from overseas. Then finance minister Silvan Shalom turned to the U.S. for help, and his successor Benjamin Netanyahu received the $9 billion in state guarantees in 2003.

A decade earlier, Yitzhak Rabin received $10 billion in guarantees to help absorb the massive influx of immigrants from the former Soviet Union. We also receive defense grants from the U.S. and these one-way transfer payments total billions of dollars every year.

These gifts are not written in stone, but are dependent on the good will of world Jewry and the American president, and only with their help will we close the deficit in our balance of payments current account. So it's a little premature to give up on the exports.

And it's also correct to plow on with the policy of cutting government expenditure so that we can cut taxes - and that Zelekha does promote. In this way, private consumption and investment can grow. Investments are our Achilles heel. They are the condition for future growth, but in lurching from one cutback to the next, government investment has fallen, despite the sorry state of our infrastructure - roads, interchanges, water, sewage, environment. Just look at the budget for the Public Works Department for this year.

In any case, it would be wrong to choose the "preferred" form of growth. That's not the government's role. Even in Russia and China, they already understand that the market knows best. Government should make do with setting the right environmental conditions to encourage growth, an advanced infrastructure, a good education system, lower taxes and lower corporate taxes - for all, with no distinction - and advancing the peace process. The rest should be left to us, the citizens.