Turning a Crisis Into an Opportunity

We are in a replay of 2001, the year the economy sank into a deep crisis and the country's leadership shut its eyes and continued to live in a fool's paradise.

It is true that the diary shows 2008, but we are actually in a replay of what happened in 2001, the year in which the economy sank into a deep crisis and the country's leadership shut its eyes and continued to live in a fool's paradise.

It was a year of wild budgetary license. Private legislation in the Knesset went on a rampage, child allowances reached new heights, the budgets for yeshivas and yeshiva students swelled, and the Israel Defense Forces received giant supplements. On the other hand, a recession had begun and the state's revenues from taxes sank. This happened because of the intifada, which had a lethal effect on tourism, on private consumption and on investments. The result was an ever increasing budgetary deficit and a loss of trust on the part of the public in the leadership.

However, the government continued to celebrate until the great crisis hit in the year 2002. Unemployment went beyond the 10 percent barrier, inflation soared and a sharp devaluation was created that brought the value of the dollar to five shekels. The Finance Ministry's accountant general, Nir Gilad, said that Israel was not able to raise even one more dollar abroad.

The situation now is similar to that in 2001. The reasons for the crisis are indeed different but now, too, the financial crisis is threatening to turn into a tough and real crisis. Companies and businesses are being threatened, the stability of the banks, the insurance companies and the investment houses is in danger. A deep recession is at our doorstep, a recession that will bring in its wake dismissals, unemployment, devaluations and inflation - if we continue to live in a fool's paradise.

But here it's business as usual. Private legislation in the Knesset continued apace until the last minute when the parliament was dismissed. During the coalition negotiations, Ehud Barak made vast sectorial budgetary demands that went beyond reason, including that the defense budget be increased. Shas wanted child allowances to be reinstated at their previous size. The pensioners' party demanded billions for old-age allowances. Avishai Braverman is continuing to talk, even now, about increasing the budget in an irresponsible fashion, a move that would lead to lowering Israel's credit rating by yet another notch, to an increase in interest, to reducing personal consumption and to the fleeing of foreign investors, just as happened in 2002. It seems that once again everyone is continuing to dance on the deck of the Titanic.

That is why we have to change the floppy disk. What is required is an emergency economic plan that will encourage activity in the economy while waging a war against the greatest social danger of all - unemployment. This can be done, first and foremost, by a significant lowering of taxes along the entire front in the coming two years, 2009 and 2010. The company tax, which now stands at 27 percent must be lowered to 20 percent and at the same time the marginal tax rate must be lowered from 47 percent to a level of 40 percent and the tax brackets for the middle classes must be spaced out. In addition, the VAT must be reduced immediately from 15.5 percent to 15 percent a move which should have been made a long time ago.

Reducing taxes is the best economic incentive for the business sector. It will prevent dismissals. It turns many unprofitable activities into profitable ones. It does not create distortions in the distribution of resources and even leads to moving firms from abroad to Israel. For when the tax is low, businessmen will prefer to pay taxes here rather than abroad. The end result will be a rise in tax collections and not a drop. The second move is to deal with the budget itself. The government's expenditure must not be increased so it does not fall into a large and dangerous deficit, but the order of priorities must be changed inside the actual budget to earmark more for activities that promote growth and less to current and wasteful expenses. The budget must be directed toward projects that deal with infrastructure, such as roads, trains, water, sewage and telecommunications. Industry must be assisted by increasing the research and development budget and granting greater subsidies to employment in peripheral areas. It is also possible, during this period of credit squeeze, to give a state guarantee (up to 50 percent ) for bank loans that are needed by small and medium businesses.

This would mean an addition to the budget of two to three billion shekels that can be taken from other paragraphs in the budget, such as the defense budget, which managed to get exaggerated increments; lowering the overhead in the education budget; efficiency measures in the government offices; a total renunciation of political budgets during the expected coalition negotiations; freezing of wages in the public sector; and no increase of stipends.

A third and important move is to exploit the opportunity for introducing a quick series of reforms that will provide quality fuel for the growth engine - closing the Israel Lands Authority and selling plots of land freely to the people of Israel; drastically reducing the processes required for planning and building; uniting local authorities; turning government hospitals into corporations along the lines of the Hadassah or Tel Hashomer medical centers; carrying out the division in the Israel Electric Corporation; dismantling the Airports Authority; continuing to carry out the reform in the ports; carrying out a genuine reform in education, as recommended by the Dovrat committee.

One of the slogans that is uttered by every management consultant is that a crisis can be turned into an opportunity. That is right. It is possible. But in order to do so, a different, more courageous leadership, a leadership with a vision, is needed - but we have nothing like that.