Middle Israel: Can the revolution wait?

Yair Lapid’s inaugural budget is cautious and balanced, but lacks what many expected him to display upon arrival at Treasury: Courage.

May 9, 2013 23:33
Yesh Atid leader Yair Lapid addresses Conference of Presidents, Feb 12

Yair Lapid 370. (photo credit: Marc Israel Sellem/The Jerusalem Post)

Revolutions, said Lenin, cannot happen without revolutionary situations, but revolutionary situations do not necessarily produce revolutions.

The revolution Finance Minister Yair Lapid has made thousands expect – a restoration of the bourgeoisie’s clout and confidence – should make Lenin toss in his mausoleum, but the “revolutionary situation” that he diagnosed and Lapid so sorely needs is actually here. What isn’t here, at least judging by the budget outline the Treasury unveiled Tuesday and the government should endorse Monday – is Lapid the revolutionary.

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Lapid’s inaugural budget is economically efficient.

Its combination of reduced spending and expanded revenues should balance the books within three years, during which the NIS 42 billion deficit dug by the previous government will be gradually erased.

The cutbacks, as previously detailed here, will span myriad government activities, from military spending and highway construction to afternoon daycare programs and a 2-percent reduction in public service personnel.

The new revenues will come from a range of tax increases, most notably a 1.5% hike in all income tax brackets – meaning, for instance, that a gross salary of NIS 14,000 will be taxed NIS 2,308, an increase of NIS 210; a 1% climb in corporate taxes to 26%; a 1% point increase in value-added tax to 18%; new taxes on luxury items; a special tax on purchasing an added apartment; VAT on tourism services; and more.

These measures and others like them, if implemented with resolve and consistency, will suffice for the kind of bandaging Israel’s fiscal hemorrhaging demanded. The only problems in this regard are the defense budget and the deficit reduction’s pace. The hefty cut in defense spending, NIS 4b. according to the Treasury’s prescriptions, will undergo last-minute wrangling between Lapid and Defense Minister Moshe Ya’alon in the presence of Prime Minister Binyamin Netanyahu, who will then impose a number on his two senior ministers.

Then there is the time element. Lapid’s successive announcements on this front, including at one point considering raising the deficit target to nearly 5% of GDP before settling for 4.65%, were received badly, both in the markets and beyond them. In the markets, credit rating company Standard & Poor’s said literally the following day that it was reducing Israel’s credit rating for local borrowing to A+.

Beyond this, people like former finance minister Avraham Shochat, a relatively impartial expert long removed from the political fray, said Lapid’s handling of the deficit target was the kind of zigzagging the markets invariably dislike. The even more impartial Bank of Israel Deputy Gov. Karnit Flug said the message conveyed by the credit rating companies is that Israel is losing control of its budget.

Lapid, for his part, explained that the raised target only applies to the remainder of 2013, after which it will be gradually trimmed to 3% of GDP.

In short, as the government prepares to hand the budget bill to the Knesset, Lapid’s effort is focused on restoring discipline and stability in a system that, well before he became a politician, gradually eroded Israel’s hard-won, and universally hailed, fiscal discipline. “I will not hand out money that does not exist,” he said, “I don’t want us to reach Greece’s situation.”

The question, therefore, is how – if at all – any of this spirit of austerity changes not only Israeli spending plans, but also Israel itself.

IN ONE RESPECT Lapid’s budget heralds structural change. The haredi community’s relationship with the taxpayer will change thoroughly, and very likely never return to what it was, even when Shas and United Torah Judaism someday return to power. The slashing of child allowances to a flat NIS 140 per child, the drying out of cash infusions to ultra-Orthodox yeshivas, and the new demand that eligibility for subsidized mortgages and property-tax breaks be conditioned on a couple’s going to work – will pressure thousands of haredi men to join the workforce.

This transition’s many other implications notwithstanding, economically it means that ultra-Orthodoxy will not only take less, it will gradually give more – as its income taxes will grow, and it will also stimulate retail activity as a result of the growth in its purchasing power. This, then, is one revolution Lapid’s first budget ignites.

However, all other fronts of Lapid’s much-heralded middle class revolution were left eerily untouched.

The Israel Electric Corporation and seaport workers will continue skimming wages two, three and even four times higher than the average salary, while households with three children, two jobs, and a combined income of, say, NIS 18,000, will pay hundreds of shekels in added income tax, VAT and dental care for the kids. While measuring what is left of their available income, such a couple will be reminded by Lapid’s rivals that he failed to introduce the estate tax he originally intended to levy on sevendigit inheritances. And much more painfully, when such a couple buys its first apartment and pays a raised purchasing tax, they will notice that Lapid failed to reduce housing prices by offloading state-owned land to the real estate market.

Similarly, while ultra-rich corporations like Teva, Intel, Checkpoint and Israel Chemicals will continue to enjoy preferential tax deals, Lapid will begin demanding that housewives to pay health insurance and National Insurance Institute fees.

Meanwhile, a deal Lapid struck with Histadrut chairman Ofer Eini, and which the two introduced in a joint press conference, delays by two years public sector salary raises and also shaves 1% off of existing wages.

However, Eini got Lapid to shelve his plan to raise pension deductions of veteran, highly salaried government employees whose pension plans are budgeted rather than accumulated, as everyone else’s are. A deep pay cut in public sector wages, like the one Netanyahu imposed as finance minister a decade ago, is also nowhere in Lapid’s plan for now.

Understandably, then, pundits decried Lapid’s budget as unfairly weighing on the middle class while avoiding confrontation with the pressure groups and moneyed elite, which Lapid himself blamed for the monopolizing and featherbedding that push millions of working Israelis’ cost of living up – and standards of living down.

Ironically, this sense of disappointment was being vented out on Lapid’s own Facebook page, which he fashioned as an emblem of his “new politics” and social connectedness, and where his constituents now wrote he had let down the middle class and that they regretted voting for him.

More ominously, while Lapid hailed his success in averting the labor unrest with which Eini threatened him, there were grassroots initiatives on the web to return to the streets. As of Thursday, at least six demonstrations were reportedly planned countrywide.

Whether or not they now return to the streets, the budget’s discontents are the very ones who fueled Lapid’s political zenith, and while at it untapped the social spending whose bills he is now compelled to foot. Talk about paradoxes. Indeed, the sense of social injustice bubbling within large parts of Israeli society is the cause of that “revolutionary situation” which Lenin once defined, and Lapid might now be squandering.

LAPID SAYS that his austerity budget, unlike others before it, spreads the burden across the social spectrum, and that its pain will be sharp, but also short. He is right.

However, Lapid’s test will not be in his ability to manage political situations, even ones as complex as the current fiscal mess, but in his ability to undo historic deformities and in his willingness to lock horns and cross swords with vested interests, from the big unions and their perks and tenures to Big Business and its tax breaks and favored regulations.

By August this budget will become law, after undergoing some more alterations at the legislature. The markets will likely calm by then, a trend that was actually evident already this week as the shekel returned to appreciation, in fact excessively, a clear sign that traders believe Israel has already returned to its fiscal senses and its currency is a good thing to buy.

The question is whether the same acquiescence will take hold of the streets where, as Lapid surely recalls, his own constituents so recently displayed a kind of power and resolve few realized they possessed. In this regard, Lapid’s budget is poorly timed, because it comes between summer and spring, when protesters are prone to take to the streets and also stay there.

As of now, it seems that Lapid secured his left flank by placating the unions, and his right flank by avoiding war with Big Business, but neglected his own troops, the middle class, where mutiny might erupt and render his hard-earned cease-fires elsewhere irrelevant.

But even if this budget’s victims do not erupt, Lapid has no political choice but to quickly show his passengers the horizon that sprawls beyond the current storm – and unveiling the horizon will also hardly suffice.

Once the fiscal storm subsides and visibility returns, his task will be to sail to that horizon, quickly and on an even keel. And the more the horizon will approach, the more its inhabitants’ battle cries will become audible and their flailing swords visible.

Once eye-to-eye with them, Lapid will have no choice but to do what he has so far avoided: Fight.

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