Finance Minister Yair Lapid on Monday said that despite recent improvements in the deficit, he will not consider lowering taxes until at least next year, when the economic outlook should be clearer.
“I said from day one, if economics will allow us to, in the future – meaning this is not something we can look into, because the details now are very vague and changing daily – my goal always was to lower taxes if possible,” Lapid told The Jerusalem Post in an exclusive interview at his Tel Aviv office.
A week earlier, the Central Bureau of Statistics updated its method for calculating the size of the economy, resulting in higher estimates for the country’s Gross Domestic Product.
Because the deficit target is calculated relative to GDP – this year it’s set for 4.65 percent of the GDP – the new method made the target easier to hit. In addition to lower government spending, the new system put the 12-month deficit at a comfortable 3.3% of GDP.
“It’s funny, when we came out with the economic plan, people said, ‘They’ll never be able to lower taxes.’ Now they’re asking why we didn’t lower taxes already. I wish I could, but unfortunately, we have to be responsible and we have to make sure that the markets are stable, and then we’ll look at this next year,” Lapid said.
On Monday, a Bank of Israel report found that the current budget plan for 2014, which economists predicted would overshoot the deficit target, will exactly hit the 3% goal for that year under the new accounting. Yet even with the new calculation method, further cuts of NIS 3.5 billion from planned spending would still be required to keep within the legal spending limits for 2015 and 2016. To maintain sustainable deficit targets in those years, tax increases of NIS 5.5b. and NIS 9b., respectively, will be necessary as well, according to the report.
The change in GDP calculations isn’t all good news, Lapid noted. The new methodology, which included a variety of investments, didn’t affect how people’s incomes are calculated.
“The thing is, we’re now facing a bigger problem in many ways, because now the GDP is higher mathematically, at least, but the income per capita is the same, so the gaps are bigger,” he said. “Mathematically, the Israeli middle class, which is suffering enough, feels that whatever growth the country is having is not coming to it.”
Lapid and Prime Minister Binyamin Netanyahu have failed to install a new BoI governor since former governor Stanley Fischer stepped down at the end of June, leaving his deputy, Karnit Flug, as acting governor.
Lapid said that he and Netanyahu would finalize their decision on a new governor “in a few days.” In what Lapid called a “farce,” the first two nominees – Jacob Frankel and Leo Leiderman – withdrew their nominations amid apparent scandals.
The three remaining nominees – former Central Bank of Argentina president Mario Blejer, former BoI deputy governor Zvi Eckstein and former Finance Ministry director and Bank Mizrahi CEO Victor Medina – were approved last week by the Committee for the Appointment of Senior Civil Servants headed by Judge Jacob Turkel.
Among the two nominees who withdrew and the three still on the table, the backgrounds and economic philosophies vary widely.
“It’s hard to imagine how someone could want both Frenkel and Medina,” former BoI chief economist Asher Blass commented.
Asked what specific qualities or policy positions he was looking for in the next governor, Lapid said, “You just want to have a really, really good economist.”
What the nominees have in common, he said, is that “they are going to be smart and flexible enough to be able to respond to an ever-changing global market and an everchanging global economy.”
Since the 2008 financial crisis, he continued, the paradigms in economic philosophy have changed.
“None of those people are really hawkish capitalists,” he said. “I don’t think the kind of hawkish capitalist the Chicago school produced in the ’70s still exists; people understand now that even if you are a capitalist, you should be a compassionate one. And none of them is a socialist. The range is clear, and within the range there are different colorings.”
Amid reports that he and Netanyahu disagree over which candidate to choose, Lapid sought to differentiate himself from Netanyahu’s economic position.
“He’s to my right economically,” the finance minister said.“His basic school is a smaller [state], more private sector. I would like more investment from government, expenditure on education, more involvement in housing; so these are the differences between us.”
Asked why Flug, who was a favorite of Fischer’s to succeed him, was not chosen, he replied, “We didn’t overlook anyone. I appreciate Karnit, I like Karnit and appreciate the great work she did under difficult circumstance.
Of course, when you make choices, people are going to question the choices you didn’t make.”
Despite the dysfunctional process that led the first two candidates to withdraw, Lapid outright rejected giving the Knesset oversight on the governor’s nomination, as is done in certain other advanced economies.
“I think if you look at the kind of populist wave that is now storming through our parliament, you have at least a good enough reason to think that it might turn into a circus,” he said. “We don’t have a problem yet in finding good people to be governors of the Israeli central bank or taking high office, but we will soon.”
Instead, they will stick to the method of running multiple candidates through the Turkel Committee, a process Netanyahu dubbed “Turkelizing,” and then nominating one.
“We decided to ‘Turkelize’ them before instead of after,” Lapid said.
In the full interview, which will be published ahead of the Post’s Diplomatic Conference, Lapid also addresses the OECD plan to battle tax avoidance, the price of housing, Israeli productivity and how to cut government bureaucracy.