The Lapid gamble

Prime Minister Benjamin Netanyahu steered Yair Lapid to finance, hoping to see him take flak for impending tough fiscal moves

By LESLIE SUSSER
Yair Lapid Speaking521 (photo credit: Baz Ratner/Reuters)
Yair Lapid Speaking521
(photo credit: Baz Ratner/Reuters)
In mid-April Finance Minister Yair Lapid was riding high. Polls showed his Yesh Atid party winning 30 Knesset seats, as many as Prime Minister Benjamin Netanyahu’s Likud-Yisrael Beiteinu; Time magazine included Lapid in its 2013 list of the world’s 100 most influential people, and dumped Netanyahu; and Lapid talked openly about beating the prime minister for the top job next time around.
Then came the 2013/2014 budget proposal.
It laid bare a huge disparity between Lapid’s economic promises and his first actions as finance minister. Overnight his popularity plummeted. A Dialog poll published in Haaretz in mid-May showed just 19 percent satisfied with Lapid’s performance as finance minister and 58 percent dissatisfied.
According to the poll, if elections were held today, Likud would win 32 seats and Yesh Atid just 18; worse for Lapid, 52 percent of the respondents held that Netanyahu was the politician best qualified to serve as prime minister, with only 10 percent plumping for the neophyte Yesh Atid leader.
The anti-Lapid mood was infectious.
Radio and TV news programs were filled with disappointed Yesh Atid voters claiming they had been cheated. Newspaper columnists gave the finance minister a merciless roasting. The mass middle-class protest of the summer of 2011 showed initial signs of starting up again. And if Lapid had arguably been the main beneficiary of the earlier round of social unrest, now he seemed likely to become the main target.
True, he inherited a massive NIS 40 billion budget deficit from the previous Likud-led government. The big black hole was clearly the doing of Messrs. Netanyahu and his compliant finance minister Yuval Steinitz.
They miscalculated on tax revenues and handed out goodies in the run-up to the January election. Lapid’s test though would be from where he took the money to offset the deficit; in other words, whether or not his budget proposal would be in line with his savior-of-the-middle-class rhetoric.
In the election run-up, Lapid promised to represent middle-class interests with the same zeal that Shas devoted to the ultra-Orthodox Sephardi community. Yesh Atid, he declared, would be “the Shas of the middle class.” His clarion cry “Where’s the money?” implied that although there was plenty around, it was not reaching the middle class, going rather to interest groups with influence on government, like the tycoons, the big corporations, the Jewish settlements, the powerful unions and the Haredim. Lapid promised a redistribution of the national pie. And he vowed that there would be no new taxes on a middle class already groaning under a load that was far too heavy.
In one of his early post-election Facebook posts, he promised to help “Riki Cohen from Hadera,” an archetypal working middle-class figure, who, despite a pre-tax family income of around NIS 20,000 ($5,500) a month, was having a hard time making ends meet. And in presenting his austere budget proposal, he claimed it was designed to benefit “the working person.”
Lapid described what he was doing as “new politics” based on a new, more egalitarian social contract. But his old-style budget, with across-the-board taxes mainly on the middle class, and severe cuts in government spending that would hit mainly middle and lower-income groups, seemed anything but. A victim of his own stirring rhetoric, Lapid’s pre- and early post-election promises bounced back to haunt him To cover the NIS 40 billion deficit over the next 18 months, Lapid raised taxes by 13.4 billion and cut government spending by 25 billion. The problem was the way he did it.
He increased income tax by 1.5 percent in all brackets, not grading it to take more from heavy earners; he imposed an additional 1 percent on VAT, infinitely harder for the poor than the rich to bear; and he raised corporate tax, relatively low at 25 percent, by just 1 percent.
The cuts in government spending will also hit the less well off. For example, public health plans, government-funded after school programs and child allowances will be canceled or sharply reduced, not to mention the possible impact on unemployment.
To make matters worse, Lapid deferred showdowns with powerful interest groups he had promised to take on. Instead of a much-touted clash with the powerful ports and electricity corporation unions and the exorbitant salaries they negotiate for their members, he reached an agreement with Histadrut Trade Union boss Ofer Eini on industrial quiet.
He did nothing to modify the huge tax breaks afforded to large corporations like the giant pharmaceutical Teva, which reportedly is set to pay only 0.3 percent tax on its 2012 earnings, and nothing on its so-called “trapped profits” of $15.1 billion – which if paid out in dividends would be taxed to the tune of $2.13 billion (NIS 7.6 billion, or more than half the national tax increase for 2013-14) but are fully exempt from tax if reinvested – as they duly were.
Lapid has begun talks on a new tax regime with Teva CEO Jeremy Levin, but with no results so far.
As for the showdown with the Haredim, Lapid deferred for six months the ruling not to fund ultra-Orthodox schools that don’t teach core curriculum subjects like math and English. Partly because of his political alliance with the right-wing Bayit Yehudi party he did not touch West Bank Jewish settlement allocations. Nor did he find money for the middle class in the mammoth defense budget – which, although it will be slashed by 3 billion shekels (not 4 billion shekels, as Lapid had initially intended) this year, will actually go up over each of the next five years, to 59 billion shekels by 2018 as compared to 51 billion shekels today.
Lapid rose seamlessly to power by putting his finger on the source of widespread middle-class discontent – the sense that with huge gas finds and robust economic growth the country was doing pretty well, but that they had somehow been left out. His promise to invite them to the party generated great expectations. And his failure to produce a new social contract, although as finance minister he seemed to be in a position to do so, opened a huge credibility gap.
In his defense, Lapid argued that he had done what any responsible person in his position would have done. That this time not only the middle class was paying, but so were the rich. That his budget was just the start of a major all-encompassing reform, which would reduce the cost of living and improve the lives of working people. And that in 18 months, once the deficit was out of the way, people would begin to feel the difference.
Clearly Lapid is betting on an economic upturn in two to three years time, preferably in the run-up to the next election. Like former prime minister Ariel Sharon after the Gaza disengagement, he insists the voters will return. The trouble is that, in the short term at least, most people don’t believe him. The Dialog-Haaretz poll showed that 72 percent don’t believe the economy will be better in 18 months, and 69 percent don’t believe the rich will also be made to play a significant role in helping to lift the economic burden.
Truth is Lapid never really wanted to be finance minister. He wanted the foreign ministry where he could hobnob with world leaders and position himself for a crack at the top job. But he was outmaneuvered by the wily prime minister. Netanyahu steered Lapid to finance, hoping to see him take the flak for tough fiscal moves. Rather than pass what would have been a problematic budget last year, Netanyahu triggered the January election – and then foisted what would inevitably be unpopular economic steps on Lapid.
Opposition criticism was scathing. His left-tending opponents in the Knesset led by Labor’s Shelly Yacimovich argued that he should have taken more from the rich and that there were no growth engines in his overly austere budget. Most importantly, Yacimovich asserted that by following the prevalent neo-con philosophy in the Finance Ministry, Lapid had got it absolutely wrong: rather than heal the country’s economic ills, his budget could lead to a crippling economic slowdown. Instead, Yacimovich advocated Keynesian-type public spending to reinvigorate the economy and a slower closing of the deficit through more robust economic activity.
At issue is a great ideological debate: Social democrats like Yacimovich argue for more public spending and clearer tools for redistributing wealth. And, they say, even if the neo-conservatism of the past several years has been relatively good for the country, it has left Israel with a frustrated middle class and the highest poverty rate in the developed world. The comeback from Lapid and the economic establishment is that Yacimovich’s heavy spending model would drag Israel down a slippery slope on the way to an economic fate similar to that of Greece and Spain.
Clearly Lapid’s political future depends on Israel’s economic performance over the next few years. If things turn round on his watch, he will become a serious contender for prime minister, despite the current hiccup. But if not, his fall from grace could be swift and his party could implode. The main beneficiary then could be those offering the middle class a different alternative, primarily Yacimovich, or a new Labor leader, if she is ousted in the anticipated party leadership primary.
The hottest name in Labor circles is former chief of staff Gabi Ashkenazi, who, his backers claim, could supplant not only Yacimovich but also Lapid as the new darling of the middle class. 