The Wrong Solution

Not only will Netanyahu's plan not bring growth, it will harm his credibility, an asset that is so hard to obtain and so easy to lose.

Finance Minister Benjamin Netanyahu is feeling the pressure. The harsh poverty statistics published this week will be even worse next year. The current high level of unemployment will be even higher next year. Layoffs are increasing and the growth for which he so yearns is not coming very fast.

From a political point of view, Netanyahu is being worn down by the day-to-day struggle against Histadrut chair Amir Peretz and is being presented as "the enemy of the people," while at the same time his opponent, Defense Minister Shaul Mofaz, is enjoying incomprehensibly rising popularity, despite the terror attacks and losses.

This pressure apparently caused Netanyahu to make a bad mistake this week. Perhaps his first significant mistake (if we do not count the appointment of the Advisory Committee for the Bank of Israel, instead of legislating a new law for the bank and appointing a board of governors).

Netanyahu's mistake actually received sympathetic headlines in the newspapers, because at first glance, it looks attractive: raising the net monthly wages of anyone who earns up to NIS 7,000 a month by NIS 100-150. Who could oppose a bonus like that for the weaker sectors?

The idea is that if we increase the net wages of salaried workers, they will increase their spending, thus setting in motion the wheels of commerce, which will in turn move the wheels of manufacturing, and then the whole economy will start to move forward - and thus we will achieve the desired growth. So simple. So enticing. But if this is the case, why did Netanyahu just recently fight for wage cuts in the public sector? Why is he trying to lower government expenditures? Let him raise the wages! Let him increase expenditures! Let him implement the ideas of Labor and Social Affairs Minister Zevulun Orlev and economist Linda Efroni.

Apparently the formulators of the plan, among them the new accountant-general, Yaron Zelekha, have forgotten that, in Israel, growth is not achieved by encouraging private consumption. Here the overwhelming majority of private consumption, from cars to televisions, is imports. This means an increase in private consumption will increase imports and thus also the balance of payments, and that is bad. Here, lasting growth can come only by increasing exports and investments. They also forgot the second side of the equation: the taxation side. Indeed, it is clear to everyone that it is impossible to increase the budget deficit next year beyond 4 percent of the gross domestic product, so they proposed an astonishing series of tax increases to finance the reduction in income tax. They proposed levying an additional tax on cigarettes and diesel fuel, canceling the value added tax exemption in Eilat or the VAT exemption on fruits and vegetables, and maintaining the stamp tax.

Increasing the tax on cigarettes, however, will hardly increase tax revenues, because the public will switch to cheaper cigarettes and there will be an upsurge in smuggling. Raising the price of diesel means increasing the costs of trucking goods and all the other industrial uses of the fuel, which means increasing manufacturing costs, which harms the profitability of exports, and which will lead to more cutbacks and layoffs. The cancellation of the VAT exemptions will not be implemented anyway, thanks to the Eilat and farmers lobbies.

Thus, there is no chance they will succeed in collecting the necessary NIS 2 billion. In any event, there will be no increase in demand. The increase in private consumption (if it happens) will be offset by the increase in taxes. Furthermore, in our current situation, with the high uncertainty, the fear of terror attacks, and with no one knowing if his job will be there tomorrow, the tendency to save increases. This means that most of the salaried workers will take those extra NIS 100 - and save them. There will be no mad dash to the shopping malls. So the increase will not pull the economy up, but the new taxes really will harm the few budding shoots of growth.

All this before we mention the greatest asset that Netanyahu has been trying to rehabilitate since he was prime minister - credibility. After all, he promised from every podium and at every opportunity that he would not raise taxes in any form or under any circumstances. So how does he dare to go back to those old incorrect solutions?

Not only will Netanyahu's plan not bring growth, it will harm his credibility, an asset that is so hard to obtain and so easy to lose.