As FinMin, Kahlon may face standoff against Netanyahu, coalition partners, BoI

While Kahlon has not come out against funding settlements per se, members of his party have said that the process should be more transparent.

March 19, 2015 22:11
3 minute read.
Moshe Kahlon

Moshe Kahlon. (photo credit: REUTERS)

Kulanu leader Moshe Kahlon is widely expected to become Israel’s next finance minister, but he may face serious disagreements with Prime Minister Benjamin Netanyahu, a former finance minister whose approach clings more to the Right than Kahlon’s.

Netanyahu helped reduce the size of Israel’s public spending from over 55% of GDP in 2002 to just 39%, less than the OECD. That reform was largely helpful to the economy, but some economists think it may have gone too far. Israel’s government now spends less than the OECD average, especially in social areas such as education, health, and welfare.

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Kahlon told The Jerusalem Post during the campaign that he thought it wise to raise spending again, taking sides with more left-leaning parties such as the Zionist Union and Meretz.

Another point of contention may come from Netanyahu’s likely coalition partners, Bayit Yehudi and the ultra-Orthodox parties. Kahlon’s platform put an emphasis on transparency, an echo of Zionist Union’s Stav Shaffir’s cause celebre. Shaffir, a member of the Finance Committee, specifically targeted funds that passed through the committee to the settlements with little oversight.

While Kahlon has not come out against funding settlements per se, members of his party have said that the process should be more transparent so that the public can see whether settlements are getting unfair economic favors from the government. That entire process could sit poorly with the pro-settlement Bayit Yehudi.

Likewise, Kulanu supports integrating ultra-Orthodox workers into the labor force as a means of securing Israel’s long-term economic stability. The ultra-Orthodox parties will likely demand continued subsidies for religious study that circumvent that goal.

When all the coalition politicking is done, Kahlon will also have to find a common ground with an apolitical player: the Bank of Israel.

Gov. Karnit Flug is also the top economic adviser to the government.

One of her main tasks is to ensure Israel’s financial stability. That may cause clashes with Kahlon’s banking reforms, which are one of his top priorities.

Though both Kahlon and the bank favor more competition, the Bank of Israel has taken a regulatory approach. In recent months, outgoing Supervisor of Banks David Zaken has slashed a slew of fees, mandated low-cost basic accounts, created a framework to let people open accounts online, and created incentives to promote debit card use over credit card use.

Kahlon, on the other hand, wants to introduce more drastic structural changes, separating credit cards from banks, creating space for new players, and breaking apart bank partnerships.

In many ways, Flug and Kahlon are on the same page, but Kahlon errs on the side of squeezing bank profits, whereas Flug is concerned about moves that could destabilize banks.

Take as an example Kahlon’s famous cellular reforms, which helped new players come into the markets. Though they effectively drove down prices, they led to the firing of hundreds of workers and slashed profits from the cellular companies. While many are happy with that trade-off, a similar situation in the banking sector could be catastrophic if it pushes Israeli banks toward insolvency.

Some analysts believe that in a market of 8 million people, there simply isn’t room for a huge number of banks to operate. As the US and Europe saw in the global financial crisis, failing banks end up costing taxpayers money in the form of bailouts, and can cause widespread damage to the economy.

While both Kahlon and Flug want more credit available at reasonable prices in a stable financial system, Kahlon’s priorities are the former, while Flug’s are the latter. They will likely clash over the appropriate measures to strike a balance between the two.

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