'Budget should cut defense by NIS 3 billion'

The government could aid long-term economic growth if it increases its 2013 deficit target to 3.3 percent of GDP and, among other things, cuts defense spending by NIS 3 billion, a study released Sunday by the Van Leer Jerusalem Institute found.

The study estimates that a plan to spread out budget cuts and tax increases over the course of three years – instead of simply cutting the required NIS 14b. from the budget and increasing revenues by NIS 5b., as currently required – could increase economic output by 1.1% through 2020, although it would mean tackling the country’s debt less aggressively.

In a comparison of several different budgetary scenarios, the study concluded that aiming for a 3.3% instead of a 3% deficit would ultimately be better for the economy. The scenario that would accomplish this would raise both taxes and spending by equal levels of NIS 7b. for 2013, and push additional planned spending increases (and taxes to match) into 2014 and 2015.

That plan, it argues, would reduce the nation’s debt burden from 75.2% to 67.6% by 2020; whereas sticking to current deficit targets would bring it down to 65.2% in the same time-frame.

That would be worth it, the center argues, for the extra economic growth.

In an econometric analysis of Israel defense spending over the years, the study found that NIS 3b. more than necessary is being spent, based on present measures of regional conflict, US defense expenditures, and enemy defense expenditures.

It also recommended slashing tax exemptions for capital investment incentives and value added tax for tourism and Eilat, increasing taxes on natural resources, and imposing an estate tax.

The paper argues that tax reductions in recent years provided a short-term stimulus which gave the false impression of long-term growth, but actually had only a temporary effect that ultimately led to lower revenues. That, alongside the two-year budget’s inability to predict revenues accurately for two full years, added to the deficit. The study recommended avoiding any policy that would reduce demand; and ensuring new tax revenue balanced all new expenditures shekel for shekel.

According to the report, the percentage of disposable income taken as transfer payments – government expenditures that aid the poor by redistributing income – fell from 17% in 2002 to just 13% in 2011. At the same time, the redistribution became less progressive, providing fewer funds to the poor. A continuing reduction in transfer payments, the study warned, would produce higher inequality in the country’s society, already among the worst in the OECD. According to the center’s analysis, the reduced transfers left no room for further cuts in that area.

The Van Leer Jerusalem Institute will present the findings of its study in Jerusalem on Sunday night to a panel of academics and government officials including Eyal Epstein, who oversees the budget at the Finance Ministry, Karnit Flug, the deputy governor of the Bank of Israel, and Eugene Kandel, chairman of the National Economic Council in the Prime Minister’s Office.