(photo credit: Ariel Jerozolimski)
New Finance Minister Ronnie Bar-On has his work cut out for him, say the country's business leaders who are demanding that he take take immediate steps to support local manufacturers and investment.
"The Finance Minister must act now to change the policies of the Finance Ministry or else he will leading the country's manufacturing sector into disaster," said Manufacturers Association of Israel President Shraga Brosh. "The ministry's policies over the last decade have eliminated approximately 90 percent of the budget for the encouragement of capital investment, which awards grants to small- and medium-sized businesses, reducing the number from NIS 1.3 billion in 1997 to NIS 133 million today."
According to Brosh, due to the drastic cuts in Finance Ministry grants to manufacturers, not one large- or medium-sized factory has been established in Israel over the last three years, while approximately 250 manufacturers have moved production headquarters or development centers abroad in an effort to reduce costs and increase productivity.
"If this trend of cutting money to manufacturers is not reversed, then within the next 10 years 40% of Israeli manufacturers will be relocated in foreign countries," he predicted.
"Without the support of the law for the encouragement of capital investment and its manufacturer grant program, Israel will fail to produce large international companies and will also see local investments continue to drop."
Uriel Lynn, chairman of the Federation of Israeli Chambers of Commerce, however, blamed the lack of new factories on factors other than the slashing of government grants.
"While the awarding of grants is a good thing, the real problem that needs to be addressed is the very high corporate tax that businesses in the country currently pay," he said. "Right now corporate tax is 30% and will be reduced to 25% by 2010, but this won't be enough - we will need a much more drastic cut in order to remain competitive."
Brosh called on Bar-On to establish a special one-time budget allotment of NIS 2b., which he said would be used to answer a fraction of the needs of some 400 factories, which have made claims totalling NIS 10b. in additional funds.
Moreover, the Manufacturers' Association president also requested that Bar-On increase the Finance Ministry's budget for the encouragement of capital investment to NIS 600m. a year, in addition to expanding the tax incentives offered to manufacturers while continuing to finance a manufacturing employment program.
With the additional monies, explained Brosh, factory owners will be able to provide steady salaries to approximately 14,000 workers, moving them out of the poverty circle within one year while, at the same time, increasing the country's exports by some NIS 3.5b. as well as increasing the amount of tax money the country will collect.
Additionally, Brosh pointed out that the increased number of jobs would help close the gap that currently exists between Israel's unemployment numbers and those of OECD (Organization for Economic Cooperation and Development) countries.
"There is no doubt in my mind that with increased funding and support of manufacturers, we will be able to achieve growth rates of 5% to 6% a year beginning in 2008," said Brosh.
According to Lynn, however, reducing unemployment levels and increasing participation of the population in the work force can only be accomplished by a shift in the traditional approach to curbing this problem.
"The government has always thought that in order to reduce the country's levels of unemployment, export numbers needed to rise, but this thinking is flawed," said Lynn. "Figures over the last three years show that an increase in exports of 10% adds 11,000 jobs to the economy, however, this is hardly enough. We need to add approximately 90,000 jobs a year in order to significantly bring down unemployment numbers and this can only be done through increasing domestic spending power as this increases consumption and therefore creates more jobs."
To support his approach, Lynn pointed out that in 2005 Germany exported $972 billion worth of products, the most in the world, followed by the US, which exported $894b.
If one were to look only at the export numbers, he said, Germany appears to have the strongest economy, however in that same year (2005), it only had an economic growth rate of 0.09% and unemployment of 10%, while the US posted a 3.2% rate of growth and a 5% unemployment level
"Not that I am opposed to manufacturing and exporting," added Lynn, "but Bar-On must make a fundamental shift in approach in order to bring about real social and financial change."