Your Investments: Draconian budget cuts are neither

So the Knesset is back in session. After the swearing-in session on Tuesday our newly elected representatives are hard at work thinking up new ways to spend our hard-earned money and putting new limits on our freedoms. During the election campaign we heard Labor party head Shelly Yacimovich rail against impending “draconian” budget cuts.

Israel Hayom reported: “Yacimovich went on to predict that the government will cancel free education for children aged three to four, raise university tuition by 50 percent, cause the price of prescription drugs to rise by 20%, hike the cost of visiting an HMO physician by up to 50%, cut the balanced budget of local authorities and cut the budget allocated to day-care centers by 20%.”

After the recent report showing a much-larger-than-expected budget deficit, conventional wisdom says the new government will slash spending, and Yacimovich will be proven correct.

According to Globes, cuts are on the way: “Cuts in the upcoming state budget could reach NIS 21 billion, and the government is again likely to miss the deficit target without adjustments on the revenues side, according to the Finance Ministry’s first draft of the economic plan, which will be submitted to the Prime Minister’s Office within a week.

The draft was written by the ministry’s Budget Department and other units over the past six months, as the Budget Department prepares to submit a budget by August.”

But as is often the fact, the devil is in the details. What if I told you that the cuts really aren’t cuts at all, but rather a slower increase in spending than originally planned? Chances are you would think I am crazy and some kind of anti-government zealot (you may be right about that regardless).

Let’s say that you make NIS 15,000 a month, and every year you expect to receive a 10% raise. This year your boss tells you since the company isn’t doing so well, you will have to make do with a 5% raise.

Your new salary will be NIS 15,750, which is more money than you made last year. This is how normal people view increases and cuts. If you have more than last year, it’s an increase; if it’s less, it’s a cut.

Unfortunately, that’s not how the government views cuts and increases.

For a government, if you plan on spending NIS 40 million more than the previous year and end up spending only NIS 20m. more, you cut spending. Think I’m nuts? Let’s look at the details.

Globes reports: “The 2013 budget can grow by no more than NIS 12 billion, and the 2014 budget can grow by no more than NIS 9b., for a total growth of NIS 21b. (before spending). However, Finance Ministry calculations show current commitments at NIS 40b., which means that the budget base for 2013-14 must be cut by NIS 20b. Under the Finance Ministry’s plan, half of the planned cut is marked by categories, and half will be submitted after a meticulous examination of every budget item of the NIS 340b. budget.”

Keep in mind that Israeli budget expenditures were a bit less than NIS 290b. in 2012. This means that all our favorite education, social-welfare and day-care programs will continue to receive the same, if not more, funding than in the previous year. Pretty Draconian, no? But of course our trusted group of 120 MKs probably has no clue that this is how the budget process works and will continue with their demagoguery about the awful cuts that await us.

Want to balance the budget? Truly cut spending buy 2%-3% across the board, without harming social services, by cutting fat, streamlining bureaucracy and encouraging the various ministries to be responsible with the taxpayers’ money. For example, how often do we see a rash of roadwork at years’ end to use up the remaining transportation budget.

Why not reward ministers who actually do a good job of not spending all our money and making do with less. The combination of REAL budget cuts along with encouraging economic growth will lead to a balanced budget, and, most importantly, the Israeli citizen will benefit.

To the group of 120, I beg you to remember that it’s OUR money that you are spending. Spend responsibly.

aaron@lighthousecapital.co.il

Aaron Katsman is a licensed financial adviser in Israel and the United States who helps people with US investment accounts.