'Defense hike to hit standard of living'

By DANIEL KENNEMER
August 28, 2006 08:08
4 minute read.

Amid reports that the Defense Ministry has requested NIS 30 billion for its budget over the next four years, economists on Sunday expressed serious concerns about the ramifications for the country's economy. "[Israel's] standard of living will fall in 2007 and maybe 2008, as well," said Excellence Nessuah Chief Economist Shlomo Maoz, who also predicted increased inflation and devaluation of the shekel, even if the full amount is not granted. "It won't happen. [The NIS 30b.] is only the price for negotiations. There is no funding for such a large amount of money, not even over two-and-a-half years," he said. Others also were convinced that NIS 30b. was an unrealistic number. "Firstly it's not [concentrated in] one year and it's only a request, which means [the actual increase] will not be the full NIS 30 billion. As such, it already sounds less grave," said Psagot Ofek Chief Economist and Strategist Vered Dar. "Nonetheless, there is no doubt whatsoever that this will cause problems." Dar believes there would be public pressure to shift budgetary funding to defense spending, at the expense of welfare and growth-creating items on the budget, such as education and infrastructure development. Switching tracks towards a significant increase in public spending would increase the deficit, prompting the government to raise taxes, she said. Maoz believes taxes will be raised by scaling the VAT back up, canceling Eilat's VAT exemption, increasing car tax appraisals, canceling increases to old age benefits and planned cuts to the corporate tax, as well as the medical basket. "And cuts to the budget are also like raising taxes," since citizens then must pick up the slack with increased spending on schooling and medicine, Maoz said. The increased taxation and diversion of funds to the defense budget will eventually hurt government fund-raising prospects, since the Tel Aviv Stock Exchange will suffer from capital outflows and less investment, "and then there won't be anywhere to take the money from," he said. Furthermore, increased uncertainty also will lead to higher interest rates in the market, whether or not the Bank of Israel raises rates, said Maoz. Failure to pass the budget in December and March, alongside any resulting elections, also would also increase uncertainty further, he noted. In a recent research report, Dar stressed that if the economic policy is ditched due to popular perception that throwing money at the IDF would solve the problems exposed by the Lebanon war, "the lone conception that has been proven as correct" - the government's successful economic policy stressing fiscal restraint - "will also be thrown out," along with the other perceived "failed conceptions." She also rejected the base assumption behind support for increasing defense spending. "Does anyone truly believe that with a NIS 45 billion defense budget it is impossible to equip the soldiers? Does anyone truly believe that the 'cut' to the defense budget (that didn't really happen) is what explains the results of the battle? These arguments must be rejected out of hand, as must the contention that the reduced size of the state budget (NIS 180b. budget for the government offices) is what prevented timely treatment of the residents of the North," argued Dar in her report. She noted, as well, that only the Defense Ministry budget's internal priorities - including wages, service conditions, purchasing and research and development - are set free from intervention by the Finance Ministry, the government or the Knesset. "The problem is not in the size of the budgets, but in their allocation. The solution is, therefore, not in increasing the amounts, but in allocating them [differently]," she said, noting that increasing the budget was likely to worsen distortions in the defense budget. She said it would not be so bad if the government just "gives up on the track" of reducing the debt and deficit and exceeds the permitted 1.7% annual rate of expansion of budgetary spending for one year. "But past experience shows us that once we've compromised an anchor - such as the 1.7% rate set down in law - the way back is very difficult ... The path from there to losing the credibility earned over the past few years at a very high price, is not long. We've already been there, " she said and warned that any ostensibly "one-time" deviations from policy could create "severe credibility problems." Maoz, meanwhile, said that "much more" money would have to be spent on re-equiping the army and improving the preparedness of the homefront but that careful consideration needs to be paid to where the money goes. "Before they give money to the Defense Ministry, there is a need to bring order to the ministry's budget in terms of the wages of captains, career servicemen and their conditions, as well as the employees of the ministry itself. Much must be cut from there, and a reform must be carried out on the budgets of the IDF and the ministry."


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