Though he did not have to, Finance Minister Yair Lapid appeared Monday before the Knesset and defended his budget proposal for 2013-2014. His decision to publicly stand behind the proposed fiscal cuts and tax hikes necessary for a more balanced budget revealed Lapid’s integrity, but also exposed him to bitter criticism. Opposition MKs, particularly parliamentarians from the ultra-Orthodox Shas and United Torah Judaism parties, repeatedly interrupted Lapid’s speech, rendering it nearly unintelligible.

MK Meir Porush (UTJ) accused Lapid of trying to “take away the bread of a small child whose father happens to learn in a yeshiva.” MK Israel Eichler (UTJ) likened Lapid to a predatory bird that smiles as it “tears apart its prey.”

The haredi MKs were up in arms over a proposed 40 percent cut in child allotments that currently cost taxpayers NIS 7.5 billion annually. Shas and UTJ’s constituencies, who tend to have large families, would be hit disproportionately hard. The haredi MKs were also protesting a 30% cut in yeshiva budgets designed to encourage young men aged 23 or older to get off the dole and into the labor market.

Meanwhile, on Tuesday, Histadrut labor federation chairman Ofer Eini vowed that the unions would fight any attempts to hurt workers’ rights. He was referring specifically to a proposal to end tax exemptions on capital gains from “training funds” [karnot hishtalmut] enjoyed primarily by upper middle class unionized workers and to freeze a planned salary hike for public sector employees, who on average are paid more than private sector workers. Eini did not rule out the possibility that he would launch a general strike in protest.

Unfortunately, neither the haredim nor the Histadrut are willing to come to terms with basic fiscal realities. Faced with a whopping NIS 39b. budget deficit for 2012, which represents 4.2% of the GDP, the new government is forced to make some difficult decisions. Stringent measures are needed to bring the budget deficit back in line with a more acceptable 3% of GDP. All sectors of society and all government bodies will feel the impact. Even the defense budget, which has traditionally been spared deep cuts out of fear – justified or not – that doing so would hurt deterrence and military capabilities, will be cut by NIS 4.5b. over the 2013- 2014 period. An across-the-board 1% hike in income taxes will affect every worker and a 1% rise in value-added tax will affect every consumer.

Admittedly, more needs to be done to reduce the intolerable levels of inequality in Israeli society. A dozen or so tycoon families, who own pyramid-structured monopolies, choke competition, foster a misallocation of bank credit and distort the markets. Where previous governments have failed, the present government has promised to tackle this major obstacle to the unleashing of free market forces – which is, to a large extent, the legacy of decades of quasisocialism and statism that created a debilitating nepotistic alliance among politicians, top bureaucrats and a few well-connected businessmen.

But the wide-reaching reforms that are desperately needed to level the playing field and make our markets more competitive will take time. Meanwhile, it is absolutely imperative that fiscal discipline is maintained. And all walks of society will have to pay the price.

Histadrut leadership – for too long a tool of a few strong unions such as longshoremen, airport workers and Electric Company employees – must understand that they can no longer hold the entire economy ransom. The government’s refusal this week to back down to the striking El Al, Israir and Arkia workers sent a strong message to unionized labor that the interests of the wider public (more competition, lower prices and economic growth) will be placed before those of a few thousand unionized workers.

Members of the rapidly growing haredi community, meanwhile, must realize that they cannot continue to be a drain on the economy. Society pays a high price for a haredi ideology that shuns gainful employment in the name of Torah scholarship.

More than the welfare and yeshiva budgets paid by tax payers, the real cost to society is the lost potential: the innovations that are never developed, the entrepreneurial spirit that is never given expression, the production potential that is never realized.

Eventually, the hegemony of the strong labor unions and their bullying tactics will be a thing of the past and the haredi population will gradually integrate into the labor force.

These trends cannot be stopped. The question is whether leaders in the Histadrut and in the haredi community will be facilitators or obstacles in the Israeli economy’s inevitable transformation.

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