Prime Minister Binyamin Netanyahu recently announced to the nation that rather
than hike our taxes, he’ll increase the budget deficit to 3%.
words, he told us that rather than increase the state’s revenue, he’ll increase
The national budget is much like any household budget, except
that it’s bigger and more complex. The core considerations are identical. The
ideal both on the private and the public plane is not to spend more than comes
When expenditures outstrip income, individuals typically make up the
shortfall via an overdraft, while the state runs a financial deficit. In both
cases debt is incurred and, in both, the larger that debt becomes, the greater
the burden and the inherent danger.
When things were good for the Israeli
collective during 2010 and 2011, it meant an annual growth rate of 4.7% and a
falling deficit. It was easier to make ends meet. Had these conditions
persisted, our budget deficit was forecast to shrink to a mere 1.5%,
constituting an exceptional achievement in international terms.
good times are over, for many reasons.
Looming large are the downturns in
both America and Europe – our major trading partners. Foreign slumps lower the
demand for our exports, while an artificially overvalued shekel makes our
products too expensive and less competitive. Fewer exports mean lower revenues
for the Treasury and less hiring, if not actual layoffs.
If things don’t
worsen, 2012 will end with 2.5% growth and a 7.5% jobless
Concomitantly, expenditures are up due to the social justice
protests. This boils down to greater debt, unless more taxes are collected to
cover the growing spending.
To put things in perspective, we need
remember that in most developed countries the deficit ranges from 5% to 10%.
However, the cost of borrowing is far higher for beleaguered Israel than
A higher deficit limit will enable the Treasury to desist from
such unpopular moves as raising the regressive VAT this month by a full
Yet there’s no certainty, as Finance Minister Yuval
Steinitz owned up, that no taxes will be hiked.
Income tax is likely to
go up by an average of 2 percentage points. Contrary to local myth, we aren’t
the First World’s most overtaxed nation. In fact, the tax burden is heavier than
ours in 18 of the OECD’s 31 members. Failure to increase the government’s income
might inflict a deficit of nearly 5% on our economy, which comes perilously
close to crisis proportions.
The populist clamor to levy extra-cumbersome
taxes on the rich won’t plug the budget hole, because it would take at much as a
20-percentage point hike to achieve that. The resultant 70%+ income tax brackets
would merely result in capital flight and more imaginative tax
Higher corporate taxes would bring on recession with
unemployment figures that our economy would not be able to sustain. The only
feasible alternative, despite the prime minister’s rhetoric, is some degree of
an tax rise for all income brackets.
This is highly unpopular, which is
why Netanyahu doesn’t dwell on the inevitability. This is also why those
Treasury officials in charge of balancing the budget push for it.
deficit could be trimmed by spending less. This would mandate an
across-the-board cut in the outlays of all ministries. Yet any decision to
tighten ministerial belts triggers sonorous outcries, political confrontations
and yet more social protests.
The abiding temptation, consequently, is to
forget the deficit for as long as possible. However, the notion of spending now
and ignoring the future is irresponsible.
A bloated deficit cuts growth
in the long run. It affects the economy much as an excessive overdraft paralyzes
Probably the only compromise between the shorthaul
temptation and the long-range danger is a modest tax increase for all income
brackets, politically unsavory as it may be. It would do less harm than other
available solutions, while preventing the national economy from sinking too deep
into the red.
It is time for our leaders to tell it like it is and not to
foster false expectations.