Where’s the social justice?

A look at Lapid’s new budget.

June 20, 2013 14:15
Finance Minister Yair Lapid at the Knesset's Finance Committee, June 11, 2013.

Lapid at Finance C'tee meeting 370. (photo credit: Knesset)


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In the summer of 2011, the biggest wave of protests in the history of the country swept through Israel.

There were demonstrations and tent cities from Kiryat Shmona on the Lebanese border to Beersheba in the Negev, all calling for one thing: the right of ordinary, hardworking Israelis to be able to make ends meet.

Enough is enough, they declared.

We’ve fought in wars for this country, we’ve worked hard all our lives, and a few millionaire tycoons are making larger profits than ever while we’re going into debt and struggling to pay bills that were once much more affordable.

Something about the whole situation seemed fundamentally unjust, which is why the main slogan of the protesters caught on so naturally: The people demand social justice.

The immediate outcome of the protests was unfortunately negligible.

Prime Minister Binyamin Netanyahu refused to implement any of the demands of the Social Justice Forum, a confederation of all the main organizing bodies in the social protest movement.

He instead created the Trajtenberg Committee for Socioeconomic Change, restricted its authority so that it could offer only cosmetic changes to a fundamentally dysfunctional system, and then proceeded to implement only a partial list of its already inadequate suggestions.

The protest movement ended with popular support from about 80 percent of Israelis. By October of that year, with his poll numbers plummeting, Netanyahu came up with a plan to resuscitate his political career: He struck a deal with Hamas to release 1,027 Palestinian prisoners in exchange for kidnapped IDF soldier Gilad Schalit in a move that blatantly contradicted every position he had ever stated on the matter. As Netanyahu’s top negotiator later shamelessly admitted, the Schalit deal was at least partially motivated by a desire to distract the country from our anger at the prime minister following his indifference to the struggle for social justice.

A missing picture Though the protest movement captured support from the public and sympathy from local media, it failed in one crucial respect: showing Israelis where the essence of the problem lay.

There are two fundamental issues with the Israeli economy, both of which the public understands very little about, largely because the politicians and economists responsible for them don’t particularly want the average Israeli to understand.

First, the amount of public spending as a percentage of GDP has been dramatically reduced over the past two decades, weakening services on which the lower and middle classes depend, like education and healthcare. The Total Expenditures Law has dictated for over a decade that government spending can increase at a maximum of 1.7% to 2.6% a year. But the economy itself has grown roughly 5% a year, which means the government’s role in the economy has shrunk. Public spending was 50.4% of GDP as recently as 2002; this year, it will be about 40.1%. Things become clearer when one takes away defense spending: The country’s level of civilian spending is lower than all developed countries besides South Korea and the United States as of 2009.

Why is this bad? Israel, despite the limited resources of its early decades, once had a vibrant public education system, high-quality healthcare for all, and all the other trappings of a successful welfare state. A government cannot maintain these vital public services – all of which were popular with the Israeli public – with the third-lowest level of civilian spending in the developed world. Despite the rapid growth of our economy over the last two decades, the country’s teachers, doctors and social workers are among the lowest paid. As a result, the country’s education system, which determines more than anything else the level of equality or inequality in society, has experienced a dramatic decline over the past two decades.

Second, the way taxes are paid has become increasingly regressive, requiring that the poor and middle class pay an increasingly larger share.

There are two main taxes on individuals and families around the world: income tax and value-added tax (VAT), also known as sales tax. Income tax, in the vast majority of developed countries, is progressive: The richer you are, the higher the percentage of your income you pay. VAT, on the other hand, is more regressive: Every person has to pay the same percentage, whether they’re a millionaire or a janitor. Over Netanyahu’s four-plus years in office, he’s tried to reduce the deficit. Normally he cuts public services, but sometimes he opts to raise taxes. When he does, it’s always the regressive VAT that goes up, from 15.5% to 16.5%, then to 17%, and now to 18%. The corporate tax rate, which he successfully cut from 36% to to 24% with plans he created as finance minister almost a decade ago, remains near its historical low, while VAT has returned to its historical high.

What we understand when we zoom out and look at the big picture is exactly why the average Israeli is upset: They’re paying more and more of the burden for a government that helps them less and less.

Consequently inequality has grown dramatically in the country over this time. The GINI Index is the world’s leading measure of economic parity. Israel’s GINI score was 35.5 in 2001 but was 39.2 by 2008 – higher (more unequal) than any country in Western Europe, and worse than all OECD countries besides the United States, Mexico and Chile. The OECD announced recently that Israel has now replaced Mexico as the country with the highest poverty rate at 21%, up from 14% in 1995. Since the 1980s, Israel has experienced a larger increase in poverty than any other OECD country, even though its economy has quadrupled in size.

A love-hate relationship with deficits The summer of 2011 did convince Israelis that our situation was unfair and that the people could actually accomplish something if we took to the streets.

But it didn’t successfully educate the public about the core of the problem: neoliberal policies aimed at shrinking vital government services and making the poor and the middle class pay more.

This January we had our first elections since the 2011 protest movement. Netanyahu stayed in office, but the real story of the election was former journalist and media wonderboy Yair Lapid. His brand new Yesh Atid party harnessed the yearning for change that came from the social protest, and won 19 seats, becoming the second-largest party in the Knesset. Among his prominent campaign slogans were “Where’s the money?” and “We came to change things.” He gave clear proposals about drafting the ultra-Orthodox, but left his economic policies vague, offering promises to finally represent “middle-class Israelis.”

Lapid is now finance minister, the public official primarily responsible for setting the national budget.

He announced his initial budget plans last month, and they were something out of Netanyahu’s neoliberal fantasies: NIS 30 billion of budget cuts and NIS 9b. of tax hikes.

It’s odd that the main issue he chose to tackle was reducing the deficit. Deficits are bad when they build debts that grow compared to GDP, which ultimately leads to economic collapse (just look at Greece).

Unlike the United States and most of Europe, however, Israel’s overall debt as a percentage of its GDP has actually shrunk over the past decade. Economies don’t have debt crises when that ratio is shrinking, so it seems odd that our finance minister and prime minister would fixate on the deficit.

Yet this is the heart of neoliberal economics: using deficits as a pretext for implementing additional free market policies, slashing social services and improving conditions for corporations and the wealthy. It’s called starving the beast, and it was was perfected by the Republican Party. The plan has three phases: First you cut taxes in order to create a deficit, then you complain that the deficit is too big and then you blame social programs and cut their funding to solve the deficit crisis you’ve manufactured.

The plan has been executed flawlessly in the United States over the past 12 years. Republican George W. Bush came into the presidency with the largest budget surplus in American history. He then issued massive tax cuts – primarily to the wealthy – even while launching incredibly costly wars in Iraq and Afghanistan. Not surprisingly, this created the largest budget deficit in American history. He justified his tax cuts, which turned the surplus into a deficit even before September 11, by saying that they would place a “fiscal straitjacket” on Congress. As Nobel Laureate and Princeton economist Paul Krugman pointed out in 2003, Republicans and anti-tax activists were admitting that the goal of tax cuts “is reducing the size and scope of government by draining its lifeblood.” Now, despite creating the modern deficit, the Republican Party is “outraged” by that deficit.

The party ardently refuses to allow a reversal of the Bush-era tax cuts that caused the deficit in the first place, and instead focuses on what their goal was all along: reducing government spending.

Netanyahu’s done the same thing, although he’s taken a slightly more elaborate path. Back when he served as finance minister in 2004, he cut social services and fired enough government employees that the country was actually slated to have a budget surplus. But that never actually happened, because he issued massive tax cuts instead (mainly to corporations) over objections from the Bank of Israel that the money ought to be used to help reduce the country’s debt.

So when he now talks about the urgency of reducing the deficit and paying off our debt as if those are his real economic priorities, we can safely ignore his doublespeak. Netanyahu’s policies are the same whether there’s a deficit or a surplus: reduce the government, cut social services and give tax cuts primarily to corporations (in a recession) or raise taxes primarily on the average Israeli (if there’s growth). For the prime minister, a deficit is just a convenient method of justifying this redistribution of wealth.

Lapid’s new budget: More of the same Lapid’s budget proposals show that he feels the same way. He prefers spending cuts to tax increases by a ratio of 3:1, and when he does have to increase taxes, he prefers that the wealthy feel it as little as possible. His proposed budget cuts are exactly those that will hit average Israelis hardest: cutting money from public transportation; lowering the salaries for teachers, social workers and other government employees; and taking away free dental care for children under 12 and free after-school programs up to age nine.

The tax hikes he advocates have again been disproportionately regressive. Budget negotiations are still under way, but his main tax proposals have been increasing VAT from 17% to 18%, increasing income tax by 1.5% across the board and adding VAT to fruit and vegetables. The only significant tax increase that’s somewhat progressive is his 1% planned increase in corporate taxes. That, unfortunately, is peanuts considering the corporate tax rate was cut by 12% between 2004 and 2011 thanks to a few plans coined by none other than finance minister Netanyahu in 2004 and 2005. It is especially appalling that Israelis will need to pay more for milk and bread, while Teva Pharmaceuticals, the world’s largest generic drug manufacturer, continues to pay a corporate tax rate of just 0.3%.

So this budget is more of the same: weakening services for the average Israeli and asking them to pay more for it so that the rich don’t have to. The Finance Ministry itself has estimated that the bottom 10% of Israeli households will see an 8.4% dent in their household budget from these austerity measures, while the top 10% will lose a mere 1.6%.

But Lapid, following the neoliberal playbook, tries to hide the substance of his agenda from the public.

The introduction to his new budget cynically declares, “This is a budget of hope.... It creates a sense of equality and is aimed at the good of the working person, the fruit of whose labor upholds and sustains the Israeli economy.”

At the press conference announcing his budget proposal, his spokeswoman reiterated the same false claim: “This framework reflects the vision of Yair Lapid, who puts the working man in the center.” The conference focused on a new 25% luxury tax on items like extravagant homes and cars.

That tax will raise NIS 30 million, representing less than a tenth of a percent of the country’s deficit. The NIS 30b. cuts and the NIS 9b. tax hikes – all of which disproportionately affect working class Israelis – were barely mentioned. Apparently the finance minister hoped no one would notice the harsh new reality, or the colossal gap between his rhetoric and his policies.

Lapid has played us, the Israeli people, for suckers.

He promised change and deftly rode the revolutionary fervor pulsing through the country to stunning electoral success. At its essence, however, his freemarket policies are almost identical to Netanyahu’s.

His new budget reflects these skewed priorities and will inevitably lead to increased poverty and inequality in a state that was once based on ideals and dreams.

He fooled us once. But his true colors are now out in the open, and he’ll have a hard time fooling us again. If there’s one thing you can say about Israelis, it’s that we hate being suckers. ■

The writer immigrated from Canada to Israel two years ago and joined Kvutzot Am, a network of Habonim Dror graduates working on social justice projects in Israel. He recently completed his IDF service and lives on an urban kibbutz in Haifa.

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