The Two Worlds of the Finance Minister

Anyone who thinks that Finance Minister Silvan Shalom's plan to cut the budget to the tune of NIS 6 billion is about to be implemented is mistaken. Shalom says that one man is holding everything up: David Klein, the Governor of the Bank of Israel.

Anyone who thinks that Finance Minister Silvan Shalom's plan to cut the budget to the tune of NIS 6 billion is about to be implemented is mistaken. Shalom says that one man is holding everything up: David Klein, the Governor of the Bank of Israel.

"If he does not indicate that he will reduce the interest rate significantly, I won't go into this budget cut plan because I'm not prepared to cause, with my own hands, an unemployment rate of 12 percent," he says. "I need a tail wind. They're always telling me that resources have to be made available to the business sector, so now I'm doing this by cutting the budget. But reducing the interest rate is also an infusion of resources to the business sector, and this has to be done by the Bank of Israel ... and without it, we won't cut anything."

And what interest rate should be reached? "Three percent, at least," says the finance minister.

To explain this, he adds: "To cut the budget now by NIS 5 or 6 billion, would be the wrong thing to do. To step on the brakes in an economy that's in a recession is not the right thing to do, if it's done as an isolated action. Therefore we have to lower the interest rate to encourage activity, and I've been telling this to the Governor of the Bank of Israel for a long time. I'm prepared to implement a restraining budgetary policy, if he carries out an expansive monetary policy (that is, by reducing interest), and this is the right thing to do together."

But on the assumption that the finance minister does not succeed in getting Klein's agreement in advance to such a sharp reduction in the interest rate (and he definitely will not succeed), Shalom will have no alternative but to implement the cuts anyway. This is because despite his fears of a deepening recession and increased unemployment, he cannot carry on with a budget in which the numbers are not real.

If he does not make the cuts, in 2002 there will be a dangerous deviation, and the Finance Ministry will have to raise huge amounts of money in Israel and abroad in order to fund the deficit. This will lead to a rise in the interest rate in the long term, and cause the Governor of the Bank of Israel to increase the interest rate because of the fear of inflation.

Moreover, the moment the deficit breaks the 3-percent barrier, international institutions will bump down Israel's credit rating, and then international interest rates will rise with respect to Israel. This will lead to a stoppage of investments and foreign investors will pull out, so that the recession and the unemployment will come from this dangerous direction of crisis. Therefore, even though Shalom is trying with all his might to bind Klein to the move (and it really would be better if Klein did reduce the interest rate at a fast pace), even without him the finance minister will have to make cuts.

But Klein is not the only obstacle. Sources very close to the finance minister are also saying that there is another problem: Prime Minister Ariel Sharon. Though at present he is giving public support to the budget cut plan, at the critical moment he could break away - and such things have happened.

At the Finance Ministry, they're saying that a political injustice has emerged that is making any move difficult. In internal discussions, face to face, Ariel Sharon is in favor of "giving" and against cuts, but for external consumption he is saying high and mighty things about the need for budgetary restraint.

In this way he is enjoying the best of both worlds: The people of the Likud central committee, heads of local councils, government ministers, Shas, United Torah Judaism and other pressure groups find that he lends a sympathetic ear to all their demands, and he is considered "good" and "social welfare-minded." For external consumption, under the eyes of the media, he makes speeches in favor of cuts, and the economic correspondents generously award him points.

However, Shalom, according to his associates, is between a rock and a hard place. He is saying no to every request for budget increases even, for example, by the Jewish settlements in Judea, Samaria and Gaza beyond the June 4, 1967, borders, and thereby he is making himself hated by the people in his party's central committee.

"He's burned in the central committee," say his close associates. "If he doesn't open his fist, he's lost." According to them, there is no deviation in the budgetary expenditures for 2001, and the entire increase in the deficit (which this year will reach 4 percent) is the result of lowered tax revenue. Nevertheless, in the media the finance minister is depicted as "Shalom-I've-Got-It" - and thus he is in double trouble. This injustice is making the people at his bureau very angry.

But after the reports of the "strictures" on the way, Shalom knows that he has to end every conversation with a few words of hope to cast a glimmer of a rosy hue over the picture. "We are currently facing a step of the utmost importance that will get the economy out of the recession it's in. This is a plan that will make resources available to the business sector, accelerate growth and decrease unemployment." The only problem with these fine words is that three months ago, when Shalom presented the 2002 budget to the government, he said exactly the same things about a budget that in the meantime has become totally irrelevant.