A number of negative indicators have pointed to a coming economic slowdown and
the urgent need for fiscal discipline. The economy has been hit hard by Europe’s
The Europeans make up Israel’s single largest export
destination. And with Greece, Italy, Spain, Portugal and Ireland dragging down
the more stable economies of Germany and France, it is not surprising that
Israeli exports are hurting. Compounding the problem is the stagnation of the US
economy and slower growth rates in China and elsewhere in the Far
In June, the trade deficit (adjusted for seasonal influences and
not including ships or diamonds) was $1.85 billion, the largest since January.
Looking at the entire first half of 2012, exports as a proportion of imports
dropped to just 67.5 percent, from 76% in the same period last year and 83% in
the first half of 2010. And weaker export is plaguing all economic sectors from
hi-tech to low-tech to traditional industry. Hi-tech in particular, which at one
point accounted for more than half of export revenues, now compromises
The sharp drop in exports is one factor contributing to the
depreciation of the shekel against the dollar.
And the depreciation of
the shekel will increase inflationary pressures. Unemployment will inevitably
rise as well, as the global economic slowdown is felt
Unsurprisingly, the Central Bureau of Statistics downgraded its
GDP growth estimate for the first quarter of 2012, to an annualized 2.7% from
3%, and even this might be overly optimistic.
At a time when the economy
is slowing, Prime Minister Binyamin Netanyahu’s government has instituted
several major spending increases. The minimum wage was raised and public sector
wage hikes were given to interns, nurses, social workers and contract
The budget for higher education was increased; a security fence
is being built on our border with Egypt to prevent African migrants from
entering; the Trajtenberg Committee for Socioeconomic Change’s proposed cut in
the defense budget was not only scrapped, the defense budget was increased in
light of the unstable geopolitical situation. Under the circumstances, the
government has scrambled to otherwise reduce government expenditures and to
On Monday, the cabinet is scheduled to vote on a
number of steps include raising value-added tax from 16% to 17%; raising income
tax by one percentage point for those who make more than NIS 8,881 and by two
percentage points for those who earn NIS 67,000 or more; an across-the-board cut
in all ministry budgets (except defense, education and social services); and
raising the tax on cigarettes and beer.
The urgency of the cuts and tax
hikes grew after credit rating agencies warned that Israel might be downgraded
if the budget deficit for 2013 reaches 4%.
The government has already
decided to increase the deficit from 1.5% of GDP to 3%, against the
recommendation of Bank of Israel Gov. Stanley Fischer. And even that limit might
be violated if economic growth continues to slow down.
Still, while it is
important for the government to maintain fiscal discipline, one cannot help
getting the impression that the recent steps proposed to reduce the budget
deficit were the result of hasty decision making.
As former Bank of Israel
governor David Klein pointed out, “It appears as if somebody is frightened and
said that something needs to be done quickly.”
Raising VAT is, of course,
the easiest way to quickly increase state revenues, but VAT is also a regressive
tax that hurts the poor disproportionately. And raising income taxes for the
middle class will only increase the burden on that section of society that is
already struggling to make ends meet.
Unfortunately, more ambitious
reforms such as increasing competition in fields such as banking, food
production and insurance or increasing efficiency at our ports, the Israel
Electric Corporation or the public sector have been
Admittedly, implementing such reforms would require a
willingness on the part of the government to confront powerful business and
labor interests. But these reforms would do more to lower costs, stimulate
business activity and reduce income inequality.