Budget talk

Ronald Reagan, while serving as US president, was once asked what he was going to do about the growing American deficit.

“I’m not worried about the deficit. It is big enough to take care of itself,” Reagan quipped.

In a speech last month at the Bible Lands Museum in Jerusalem, Bank of Israel Governor Stanley Fischer warned that the new government “will not have an easy time in the near future.” Fischer was referring to the worrying expansion of Israel’s fiscal budget deficit. To remain within the deficit limit of less than 3 percent of GDP set by the government for the 2013 budget, Fischer warned, the government will have to implement a painful combination of budget cuts and tax hikes to add at least NIS 12 billion to the budget.

The other option – which Fischer clearly opposes – would be to change the law limiting the budget deficit and allow the budget deficit to grow. This could easily set in motion a vicious cycle in which the government becomes increasingly dependent on credit to finance its operations and digs an ever deeper deficit for itself, leading credit agencies to lower our credit rating and resulting in an exodus of foreign investors.

Israel does not want to wind up in a fiscal crisis even vaguely resembling that which the US has experienced.

On Sunday, we received additional proof that tough times are ahead. According to initial indicators, the budget deficit for 2012 was NIS 39 billion or 4.2% of GDP, more than double the government’s target of 2% of GDP.

Besides 2009, the year following the sub-prime meltdown in the US, this year’s budget deficit was the largest as a percentage of GDP than any other year since 2003 – when our economy was on the brink of a major economic crisis.

Admittedly, the health of our economy – at least as reflected in important macro data – is impressive.

GDP growth of 3.3% in 2012 was the highest in the Western world (the OECD average was 1.4%) and even outpaced Australia’s economy, which benefitted from huge exports to China. And our unemployment rate is also one of the lowest in the West.

However, our political leaders must be careful. The storm of protest against high prices and low wages that swept the country in the summer of 2012, bringing hundreds of thousands onto the streets, helped soften the government to concessions.

Haredim received higher child allotments; the Histadrut won a landmark wage agreement for subcontracted workers; doctors, nurses, teachers, longshoremen, Israel Electric Corporation workers, airport employees – even social workers – managed to receive wage hikes; the state began subsidizing preschools from age three; parents with children were given income tax breaks; afternoon childcare was subsidized. All of this and more cost the government billions of shekels.

Finance Minister Yuval Steinitz promised Sunday that there would be no tax hikes, and Prime Minister Binyamin Netanyahu predicted that 2012’s big budget deficit would “not have ramifications for Israeli citizens.” But these sorts of comments appear to be merely election campaign talk. The present government’s unwillingness to make painful budget cuts and tax hikes immediately before the 2013 elections precipitated early elections in January instead of October, and resulted in a potentially damaging delay in the passage of the 2013 budget until mid-2013.

We should demand candidness from our candidates regarding how they propose to tackle the budget deficit. Because it is obvious that after elections, when politicians are less beholden to their constituents, “unavoidable” tax hikes and cuts in government services will be discussed again in the Knesset and in the cabinet.

Better that the discussion begin now, before the elections, so we can all make a more educated choice at the ballots.

Despite Reagan’s witty remark, we can’t let our growing deficit take care of itself – or we’ll find ourselves facing a serious fiscal crisis.