National debt daze

Cheer up, Israel's government is relatively 'asset rich'.

By JONATHAN LIPOW
dollars 88 (photo credit: )
dollars 88
(photo credit: )
Over the past few weeks the notion that our national debt - the sum the government owes to foreigners and its own citizens - is far too high has become remarkably popular. The claim is that Israel allocates 6% of GDP to government debt repayment, and a lot of money could be saved in interest if we cut the national debt from roughly 100% of GDP to the 50% common in other industrialized countries. The argument is nonsense. First of all, it is not meaningful to discuss gross national debt figures. The correct number to consider is the net national debt, which combines gross debt and the government's assets. While it is true that Israel's gross debt is much higher than that of other developed countries, Israel's government is relatively "asset rich." In terms of net national debt, Israel appears to be a typical industrialized country. WHAT ASSETS does the government hold? For starters, the Bank of Israel holds $27 billion (23% of GDP) in foreign exchange reserves. By comparison, the US holds less than 1% of GDP in reserves. Second, the government has, over the years, lent out a lot of money to various firms and institutions. The value of those loans should be counted as an asset, just as it would be if Israel was a business. I could not locate exact figures for the value of the loans, but according to the FY 2006 budget proposal, the government expects to receive a little over 1% of GDP in interest payments and a similar amount in payment of principal during 2006. These numbers - particularly the interest payments - suggest that the government is owed somewhere in the neighborhood of 15% of GDP. Next, of course, there are the state-owned firms and "government authorities." Based on valuations for similar assets abroad, the oil refineries are worth about 2% of GDP, while the Electric Company is worth 8% of GDP. Then there are Mekorot, IMI, IAI, Ben-Gurion Airport, the sea ports, and a lot of other large assets. To be sure, the managers, suppliers and workers in these entities will succeed in looting a good portion of the value embedded in these firms, but - conservatively - we could value the government's portfolio of enterprises at 10% of GDP. Finally, it should be remembered that the government owns an unusually large proportion of Israel's land, and that this land is worth a lot. Indeed, on paper, government real-estate holdings are easily worth more than 200% of GDP. Of course, only a small proportion of that huge sum will, or even should be realized. My guess would be that the value the government's real-estate holdings will actually realize is about 20% of GDP. Subtracting all these assets from Israel's gross national debt we find that the net national debt is about 35% of GDP. Compared to the net national debts of other industrialized countries, Israel is in a reasonable position. WHAT ABOUT the argument that if we paid off the national debt we could save a lot of money? Anyone arguing that point should have failed any course in introductory economics. Reality is that the net present value of a debt (the cost of paying off the debt when measured in current shekels) cannot be changed by fiddling with the payment schedule. To be sure, there are situations where it makes sense to reduce the national debt. The "wall-to-wall" consensus approach to this is based heavily on a synthesis of ideas from Frank Ramsey, Milton Freidman, Robert Barro and Robert Lucas. In the consensus approach it makes sense to reduce the government's debts if the current schedules of taxation and government expenditure imply that future expenditures will have to be drastically cut - or, alternatively, that future taxes will have to be sharply raised in order to assure long term fiscal balance. The US and Japan, for example, face this predicament and need to seriously consider spending cuts and/or tax increases. What about Israel? Israel's current tax regime should generate far greater revenue than required to fund currently projected expenditures. As such, it makes sense for Israel to follow a policy diametrically opposite to that required by the US. Israel should lower taxes (a lot) and seriously consider increasing government expenditures (a little). The writer is an associate professor of economics at the Academic College of Judea and Samaria.