Margaret Thatcher’s death this week, and the lively debate it touched off
concerning her economic legacy, provided the perfect backdrop for the fiscal
drama in which former newscaster and screenwriter Yair Lapid now finds himself
While economically imperative, the expected package of taxes
and cutbacks has thrust the new finance minister into the social, strategic and
political fray so abruptly that one thing can already be said about his
situation with certainty: The Lapid who will emerge from this crucible will not
be the Lapid who entered it.
The need for the cuts is glaring. A NIS 40
billion budget deficit, equal to 4.2-percent-of-GDP, demands immediate
treatment. That is what most economists think, and that is also what most
citizens thought when they voted for Prime Minister Binyamin Netanyahu, Lapid
and Bayit Yehudi leader Naftali Bennett, who share the late Thatcher’s
appreciation for balanced budgets and small government, as does the current
coalition’s forgotten member, Tzipi Livni.
As of this writing, the
specifics of the plan have yet to be formally announced, but the general
expectation is that roughly a quarter of the package will eye increased revenues
through increased and new taxation, and three-quarters will comprise spending
Lapid’s ax will reach every ministry, but no matter how one twists
this Rubik’s Cube, the Defense Ministry will part with more funds than any other
agency. With a NIS 60b. budget, Israel’s defense spending is 16% of the national
budget and 6% of GDP – the highest per-capita share in the developed world. The
Treasury is reportedly seeking an NIS 4.5b. cut in defense
After defense will come infrastructure projects, with plans
like the Jezreel Valley railway, the tunneled road from western Jerusalem to
Motza, and the electrification of the railway system all standing to be delayed,
slowed or suspended. Besides such specific projects, public sector salaries are
expected to be frozen and possibly cut.
Spending for ultra-Orthodox
causes, most notably transfers to yeshivas, is expected to reach NIS 1.5b. Child
allotments, which were cut sharply in 2003 and later that decade partially
restored, will once again be cut, affecting mainly low income haredi and Arab
families. The cut in this clause may reach NIS 4b.
On the revenue side, a
series of taxes stand to be raised, affecting every Israeli.
will reportedly climb by a flat 1%, meaning that, for instance, salaries of NIS
9,000 to NIS 14,000 will be taxed 15% instead of 14%; salaries of NIS 15,000 to
NIS 20,000 will be taxed 24% instead of 23%; and salaries of NIS 21,000 to NIS
40,000 will be taxed 31% instead of 30%. Corporate taxes, currently roughly 25%,
will also be raised by 1%, and the 5% health-services tax will be adjusted to
Perhaps most tangibly, value-added tax is expected to rise from 17%
to 18%. Talk of imposing VAT on fruits and vegetables has come and gone over the
past two weeks, but if this measure materializes after all, it will mean an
overnight 18% appreciation in the price of any tomato, cucumber or apple we
At the other end of the social spectrum, Lapid intends to hike sales
taxes on luxury good, from cars to houses and apartments.
painfully, Lapid was reportedly considering taxing medium-range savings, known
as “training funds,” into which wage earners and their employees deposit monthly
deductions which can be withdrawn in five-year intervals.
these proposed measures affect all social layers, from a tycoon’s income tax and
corporate taxes to a street sweeper’s grocery bag, and from a middle class
household’s savings to a working class household’s child
Lapid was careful to avoid appearing excessively harsh on any
walk of Israeli society.
The proverbial Ms. Ricki Cohen, the middle class
mother of three whom Lapid portrayed as a teacher married to “a hi-tech
employee” with a combined monthly income of NIS 20,000 and a vacation abroad
every two years – will no doubt feel pinched. However, Lapid will tell her and
her husband that had he allowed the deficit to fester, the financial markets
would have run on the shekel, quickly resulting in higher interest rates, which
in turn would have made Mr. and Mrs. Cohen’s mortgage swell more exorbitantly
than Lapid’s taxes.
Netanyahu’s cutbacks as finance minister in 2003 hurt
the underprivileged more than the rest.
Lapid’s will leave everyone
Consequently, everyone will soon be asking what
Lapid so convincingly asked during his election campaign: “Where’s the money?”
by which they will mean: How did the deficit we now have to offset grow so big
in the first place? Fortunately for Lapid, this part of the conversation will
not involve him, as he was not there when the government overspent the way it
did. However, he would benefit from learning how it happened lest it happen to
him, too. And rather than drown in numbers, as he said he now does daily, the
essentials he should know about the deficit’s birth are these.
the Bank of Israel’s previous annual report stated, defense spending in 2011
exceeded by 2.5% its prescribed target. Secondly, according to the central
bank’s subsequent report, the universities’ and the HMOs’ combined deficits last
year equaled 0.4% of GDP, after having been continuously in the red since 2008.
Thirdly, last year’s tax returns fell NIS 18.5b. short of the Treasury’s
forecasts, reflecting a slowdown in exports due to the global crisis. Finally,
despite its shrinking resources, the government spent NIS 2.2b.
its own original plan.
The unbudgeted spending went mainly to plans
related to the Iranian threat, the southern border fence, and the expansion of
free education to age three, following 2011’s social protest. It would have been
fine to make all these expenditures had they been offset by cutbacks
The failure to finance unplanned spending is then the root of
what Lapid now faces, as is Netanyahu’s inaction in the face of fiscal shots
from the hip that he would not have allowed back when he was finance
Politically, the cutbacks mean Lapid will have to routinely
face ministerial funding demands for truly important, but unaffordable causes.
The way he confronts them will decide the success or failure of his second
THE OPPOSITION that awaits Lapid made itself heard even before he
unveiled his plan.
First to speak was Transportation Minister Israel
Katz, who has been working hard for the past four years to complete big
projects, from the Jerusalem-Tel Aviv high-speed train to the Haifa-Eilat
Katz could therefore be understood for decrying proposed cuts in
“his” projects, which he said are ultimately growth engines.
Minister Gideon Sa’ar responded similarly, when he said he will oppose proposed
cuts in transfers to municipalities, as did Internal Security Minister Yitzhak
Aharonovitch, who said he would do “whatever possible” to block prospective cuts
in police budgets.
Such ministerial protestations and lamentations are
part of a time-honored Israeli ritual that is performed whenever public budgets
are cut, and deflecting them is part of an Israeli treasurer’s job description.
They seldom prove to be serious obstacles, and most complaining ministers are
expected to be silenced by Netanyahu.
Lapid will be tested according to
his handling of the social outcry that will surely erupt once the details of his
plan are unveiled.
Led by Labor and Shas, the cutbacks’ attackers will
portray them as focusing on the poor.
Lapid will respond that everyone is
affected by the cutbacks. In doing that, he will likely deploy his party
colleagues, Deputy Finance Minister Mickey Levy and Welfare and Social Services
Minister Meir Cohen, both self-made children of Middle Eastern immigrants who
were born and raised a light-year away from Lapid’s upper middle class
Lastly, the budget showdown will potentially pit Lapid
against Defense Minister Moshe Ya’alon. The latter has already been in politics
for years, and on the face of it arrives at this fight more experienced than his
rival. His response to the proposed budget is his first real high-stakes
Ya’alon’s instinct will be to oppose any cuts to “his”
ministry, like all other ministers and even more so, like the many other retired
generals who as defense ministers, represented the military among the civilians,
instead of bringing the civilians’ message to the military.
however, want to show that he is driven by concerns larger than the military’s
narrow perspective. If he chooses to in the cabinet say something like, “I am
supposed to oppose this plan, as I am the one who will foot its largest bill,
but even so I back it because this is the national interest and I urge the rest
of us to do as I do,” his stature will transform overnight from that of a
retired general to a national leader.
Chances of this happening are, of
course, limited. Then again, until three months ago chances that Lapid would be
finance minister were even lower. Now he is at the fiscal helm, and with or
without his main passengers’ enthusiasm, the clapperboard is about to snap as
Lapid’s journey into uncharted waters begins – with the entire Jewish state on