For a country in the throes of mounting national debt, Israel’s bean-counters at the Finance Ministry appear to think they have hit upon a remarkable solution – one that defies both logic and experience. Simply put, their economic philosophy amounts to: let’s spend even more money we do not have.
After figures showed the government had run up a mammoth NIS 39 billion deficit in 2012, or 4.2 percent of GDP, it became clear swift action was needed to rein in the coalition’s profligacy. As a result, headlines in recent weeks have been replete with menacing words such as “austerity,” “decrees” and “tax hikes.”
But there is a dirty little secret – more than one, in fact – that the Treasury would prefer to conceal: despite all the talk of cutbacks, government spending is actually set to increase.
In 2012, government outlays amounted to NIS 385b. Under the budget proposal submitted by Finance Minister Yair Lapid, that number will rise to NIS 388b. in 2013 and then jump to NIS 408b. in 2014. In other words, even though the government has developed this nasty habit of spending beyond its means, it is going to dig ever deeper into the public’s pockets. Hence, marginal income taxes are set to rise by 1.5%, VAT will go from 17% to 18%, and the corporate tax rate will climb from 25% to 26%.
That’s like an alcoholic trying to solve his problem by ordering another round of drinks on someone else’s account.
OF COURSE, by the time the final draft of the budget is approved in the coming weeks, the precise figures are likely to change.
But Lapid’s proposal is indicative of a mind-set in which the government acts like a drunken sailor on shore leave, stumbling along as it carelessly empties its pockets and tosses money at pretty lasses of dubious virtue. This is the fundamental, underlying problem with Israel’s current economic situation. It is not the drop in tax receipts, the strength of the shekel or even the slowdown in world trade. It is the simple fact that the government is addicted to spending and cannot control itself, finding it ever more challenging to wean itself off of this narcotic.
And that is why it is proving so difficult to take Lapid and his stewardship of the economy seriously. For despite all evidence to the contrary, he seems intent on fooling the public – and himself – into believing that this budget is brave and principled.
In the introduction to his proposal, Lapid went so far as to write that, “the budget includes the largest cuts in the history of the country.... This is a painful cut, intended to return Israel to the path of fiscal restraint.” Yet many of the cuts being bandied about in the press amid talk of slashing NIS 25b. shekels in government spending through the end of 2014 are little more than sleight-of-hand.
Much of this money does not represent a real drop in current outlays, but rather a cut in intended future spending. In other words, the Treasury isn’t really reducing our bloated government’s present intake of calories, but rather demanding that it skip that fifth slice of pizza at tomorrow’s meal, and suffice with only four. You don’t need to be a certified nutritionist to know that will not bring down your weight.
The way to stop Israel’s spending problem is... to stop spending.
Does anyone really believe it is impossible to find tens of billions of shekels’ worth of waste, overlap and inefficiencies in our distended government system that cannot be cut? Why must we the public be soaked once again for still more revenue? TO BE sure, Israel is not alone in this regard. America’s national debt is at $16.85 trillion and counting, Italy and Germany each owe more than 2 trillion euros, and France is in arrears by 1.9 trillion euros. But while misery may love company, it nonetheless remains misery, and those steering the ship of state need to be a little more courageous in how they tackle the problem.
As Ronald Reagan once noted in a September 1982 speech at Kansas State University, “Balancing the budget is a little like protecting your virtue: you just have to learn to say ‘no.’” The issue we face is not that the government does not have sufficient funds. Like every young adult entering maturity, it simply needs to learn how to manage its assets and liabilities.
So instead of heaping a new round of tax hikes on the Israeli public, the government should get its own house in order and spend within its means.
All the rest is detail.