Costly compromise

Israel pays an astronomical amount every year on interest payments to finance its growing debt.

September 21, 2014 20:47
3 minute read.
Binyamin Netanyahu and Yair Lapid

Finance Minister Yair Lapid (R) sits across from Prime Minister Binyamin Netanyahu at the cabinet meeting in Jerusalem.. (photo credit: REUTERS)

Compromise is the name of the game in politics, and it appears that a fair compromise was reached regarding the 2015 fiscal budget. Under the deal, both Prime Minister Binyamin Netanyahu and Finance Minister Yair Lapid will mostly get what they want. Netanyahu will receive a hefty addition to the defense budget of at least NIS 6 billion (which inevitably will be revised upward as the IDF faces myriad new challenges), and Lapid will stand by his word not to raise taxes (even new tax breaks will not be annulled) and will push forward with his zero value-added-tax reform for lowering real estate prices.

This allows each politician to claim victory. Netanyahu can boast that he is protecting Israel’s military edge in the face of ever-more threatening challenges. When it comes to defense, Netanyahu is clearly in his element.

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And because the military threats are hardly hypothetical, championing a beefed-up defense budget is also smart politics.

Lapid comes out of the budget compromise looking like a winner as well. He had promised not to raise taxes – something finance ministers with aspirations to become prime minister tend to do – and he fulfilled his promise.

He took a principled stand on his zero VAT plan and stuck to his guns. No matter that the Treasury’s chief economist resigned in protest over the plan, that Bank of Israel Governor Karnit Flug is adamantly opposed as well and that the plan will cost NIS 2b. to NIS 3b. yearly in lost tax revenues. Lapid can now look his constituents in the eye and declare that he has done something to bring down skyrocketing real estate prices.

Netanyahu and Lapid have reached a compromise that helps them advance their own narrow political interests.

But this compromise costs money – a lot of money – and all of us will be forced to pay.

In order for both Lapid and Netanyahu to get what they want, the 2015 budget deficit must grow. Originally slated to be no more than 2.5% of GDP or about NIS 25b., the fiscal deficit will go up to at least 3.4%. Essentially, Netanyahu and Lapid have chosen the easy way out and have postponed to some unspecified future date coping with the State of Israel’s overdraft. Lapid and Netanyahu are leaving it to future generations to deal with trimming the budget. In the meantime, inevitably, the citizens will pay the price.

Israel pays an astronomical amount every year on interest payments to finance its growing debt. Last year, NIS 40b. was paid in the form of interest payments alone. This is more money than is spent on any single ministry besides defense and education. These interest payments go toward managing a public debt that is 73% of GDP. With an annual GDP of a bit under a trillion shekels, that means public debt is around NIS 700b. This is less than the 94% average among EU-bloc countries or Japan’s 236%, but Israel faces unique socioeconomic challenges that scarcely allow it the luxury of allocating so much to interest payments.

Consistently, Israel has been ranked as one of the worst among Organization for Economic Cooperation and Development countries when it comes to poverty levels.

In June, the OECD reported that, based on figures from 2011, 20.9% of Israelis lived under a relative poverty line, which is defined as half the median salary for an average family. The average relative poverty level among OECD nations, in contrast, was just 11.5%. Israel is also ranked among the OECD nations with the highest income inequality after factoring in welfare transfers.

As we approach the holidays, the extent of the high poverty level is felt strongly. Volunteer organizations are working overtime to help bring relief to hundreds of thousands of families who are struggling to provide themselves with basics such as food and clothing.

If Israel did not have to pay so much annually to finance its growing debt, more resources could be allocated to fighting poverty. Imagine how many new classrooms and hospital rooms could be built, how many roads could be expanded and how public transportation could be improved, and how many needy families could be helped with just half of the NIS 40b. we pay every year on interest rates.

Instead of making populist compromises that only exacerbate our fiscal problems, Netanyahu and Lapid should be thinking of ways of meeting our defense and housing challenges without irresponsibly increasing the budget deficit.

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