Lapid speaking at the Knesset 370.
(photo credit: Marc Israel Sellem/The Jerusalem Post)
“Governments don’t reduce deficits by raising taxes on the people; governments
reduce deficits by controlling spending and stimulating new wealth.” – US
president Ronald Reagan
So after many zigzags and leaks to the media we finally
get to see Finance Minister Yair Lapid’s budget. The headlines are screaming
about the draconian budget cuts. In fact the Finance Ministry refers to this
being the “biggest spending cut ever imposed.”
Well, let’s take a step
back and see how this is smoke and mirrors. If this is the “biggest spending cut
ever imposed‚” then I am the queen of England. According to Globes, “Government
spending this year will be NIS 304.5 billion, 7 percent more than in 2012.”
That’s an increase of about NIS 18b.! Some spending cut.
How can we have
7% more spending this year than last and yet everyone is talking about dramatic
cuts? As a reminder, a few months ago I wrote: “What if I told you that the cuts
really aren’t cuts at all, rather a slower increase in spending than originally
planned? Chances are you would think I am crazy and some kind of anti-government
zealot (you may be right about that regardless!).
“Let’s say that you
make NIS 15,000 a month, and every year you expect to receive a 10% raise. This
year your boss tells you that since the company isn’t doing so well you will
have to make do with a 5% raise. Your new salary will be NIS 15,750, which
according to all is more money than you made last year. This is how normal
people view increases and cuts. If you have more than last year, it’s an
increase; if less, a cut.
“Unfortunately, that’s not how the government
views cuts and increases. For a government if you plan on spending NIS 25b. more
than the previous year and end up spending only NIS 18b. more, you cut spending.
Think I’m nuts – look at the details.”
It’s our money What makes this
even more disgusting is that in the name of getting the budget deficit under
control, everyone “must pay their fair share.” So we are all saddled with higher
income, VAT and corporate taxes, not to mention taxes on investment properties.
This is nonsense and will harm economic growth. We are being hit with higher
taxes to provide a fix for the government’s addiction to spending. These higher
taxes are estimated to bring in about NIS 8b. That means Lapid could have raised
spending by about 2.5% over 2012 (which is more or less the impact of inflation)
and not raised taxes one iota. There is absolutely no need to raise any taxes.
Where is the outcry? Where is the media asking these questions? I realize that
he is one of them, but someone needs to call him on this.
Want to balance
the budget? The solution is twofold.
As I have written: “Truly cut
spending buy 2%-3% across the board, without harming social services, by cutting
fat, streamlining bureaucracy and encouraging the various ministries to be
responsible with taxpayers’ money. For example, how often do we see a rash of
roadwork at year’s end to use up the remaining transportation budget. Why not
reward ministers who actually do a good job of not spending all our money and
making do with less.”
But it’s not just about real budget cuts. You also
need economic growth. There has been no talk whatsoever about policy to grow the
economy. Lapid needs to do the direct opposite of what he is proposing:
Incentivize job creators, lower taxes, encourage investment, let everyone take
home more of their hard-earned money and watch the economy flourish. Why does he
think that punishing business is going to provide more revenue over the long
run? No society has ever been taxed into prosperity. A strong economy will
provide much more revenue over time than these tax increases will ever
The combination of REAL budget cuts along with encouraging economic
growth will lead to a balanced budget – and most importantly, the Israeli
citizen will benefit.
Aaron Katsman is a
licensed financial adviser in Israel and the United States who helps people with
US investment accounts.