When You Have to Shoot, Shoot! Don't Talk

In April 1986, Moshe Nissim was appointed finance minister. He didn't pursue the job; he was led into the powerful position by circumstances (the ouster of Yitzhak Moda'i). A few months into his tenure, Nissim asked the tax commissioner to step into his office, and told him: Bring me a plan to lower income tax, National Insurance and employer tax. The tax burden is too heavy, he said. It impairs motivation to work and invest, and hampers growth. People should be able to keep most of the fruits of their labor, Nissim told Yair Rabinovich, and gave him two weeks.

Two weeks later Rabinovich submitted a plan to cut income tax by 49% to 60%, to slash National Insurance and to abolish employer tax. Nissim was not satisfied: 49% seemed like a sham number, "too close to 50%. Get back to me with a plan with an upper tax bracket of just 48%," he told Rabinovich, who did that very thing. Without public commissions or arbitration, without fuss, without Ofer Eini or Shraga Brosh. And it was a plan that gained government and Knesset approval. Taxes were cut, and the economy rebounded from recession.

That's what Finance Minister Roni Bar-On should have done last week. Instead of presenting a complicated plan that ties tax cuts to taxing study funds, he should have built a clear, clean plan to cut taxes, leaving the study funds out of it.

It was obvious Bar-On could never get cabinet and Knesset approval to cancel tax perks on study funds. Strong unions love the perk, from the Electric Company to the banks to the Israel Aerospace Industry. Why would they give it up? The only possible outcome was to weaken Bar-On, who presented a plan that could bear no fruits.

The finance minister needs to demonstrate leadership. He holds the reins of the economy and must beware, lest they slip out of his hands. His word must be final. There is no point in presenting a plan and then entering into fruitless negotiations with labor leaders.

If officials had complained that taxes couldn't possibly be cut in 2009 because of the deficit, he should have said that tax cuts would stimulate growth, which would increase tax revenues. Benjamin Netanyahu's 2003 tax cuts did increase tax revenues overall, and brought down the debt-to-GDP ratio.

Bar-On presented the 2009 budget to the cabinet on Sunday. He proposed a 1.7% increase in government spending. Meanwhile, the labor ministers, and Manuel Trajtenberg, chairman of the National Economics Council, are insisting on a 2.5% increase in government spending.

Labor ministers love to spend. Even Agriculture Minister Shalom Simhon (who has demonstrated responsibility in the past) was swept up. Haim Ramon is also an enthusiastic supporter of increased spending. And he doesn't understand the relationship between less spending, and 5% annual economic growth - achieved in spite of economic and security-related upheavals.

Trajtenberg is wrong as well. To justify his position, he presents data stating our situation is close to the average in OECD countries. But that all depends on how it is calculated.

Some studies portray the tax burden in Israel (37% of GDP) as similar to the average for OECD nations (36%), and argue on this basis that there is no point in continuing to cut taxes. However, this number is produced only if the average is calculated as a simple arithmetic average, rather than a weighted average based on the size of the population, which is the correct method.

In a simple average, the weight of Luxembourg is equal to that of the U.S., and the weight of Sweden is equal to that of Japan. And what would happen if the European Union were to consolidate into a single state? The average tax burden in OECD countries would drop sharply.

A weighted average gives an average tax burden of 31% in OECD countries, compared to our 37% - a more substantial difference.

It's exactly the same story with government spending as a function of GDP. These same studies point to a ratio of 45% in Israel, compared to 43% in the OECD. But if the figures are adjusted to give more weight to countries with more people, the average spending in OECD countries drops to just 40%.

In any case, who says we have to be average? What's the correlation between our standard of living and Holland's? Why should we care what's happening in Mexico, Turkey or South Korea? We need to be low-cost in order to attract investors to our risky state.

During the cabinet meeting, the treasury showed a complicated equation, according to which government spending will almost certainly increase if the debt/GDP ratio drops. It's a very different position than that of the treasury's budget supervisor, Ram Belnikov, who announced at the beginning of his tenure that he supports increasing spending by just 1%. And he's right.

The moment Belnikov opened the door to increased spending, all that followed is a matter for negotiation. Belnikov should revert back to his original position, because he knows the level of risk in which the Israeli economy operates. If a peace agreement is not signed, we will need to prepare for an expensive war. And if one is signed, we will will need tens of billions of shekels to pay compensation. We need to prepare now for the surprises that await us down the line.