Tempting Olmert

Shalom, like Olmert, believed he was inheriting a solid economy that could sustain fiscal expansion.

By
September 11, 2005 17:33
4 minute read.

 
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Acting Finance Minister Ehud Olmert is fortunately no stranger to his new fiefdom. He arrived at the Treasury last month with vast executive and legislative experience. Unfortunately, there is reason to suspect that Olmert's financial knowledge and administrative savvy might soon be shunted aside for political opportunism that will harm the economy. The new Treasurer is no socialist. He has generally backed Binyamin Netanyahu's reforms, at times even openly praising his archrival for the resolve and vision he displayed while leading the economy from crisis to recovery. At the same time, Olmert also consistently contended that the Netanyahu reforms victimized many, and that after having restored stability and growth the government had better get down to the business of helping the needy. In this spirit, he has asked Finance Ministry Director-General Yossi Bachar to prepare by month's end a plan for a war on poverty. Surely, fighting poverty is a cause no one can oppose. The only problem is how to wage this war, and before that, to agree on its aims. During the past three years there has been an orchestrated effort to create the impression that before Netanyahu's reforms hardly anyone in Israel was poor, and since them almost everyone is. According to this thinking, the welfare wages that Netanyahu has cut must be restored. The same school also wants fresh taxpayer moneys dispatched to the local governments that Netanyahu disciplined in a way no one had dared to do. Olmert should be disabused of such thinking before he welcomes it, as he seems prepared to do. For one thing, some of Netanyahu's wage cuts already have been restored, first in the wake of Labor's entry into the coalition, then in the framework of the latest round of tax cuts. More importantly, there is a clear relationship between the cuts in social spending and the rise over the past three years in growth and employment, as well as the decline in interest rates and the restoration of the shekel's stability. Other anti-poverty measures contemplated these days like the negative income tax benefiting low-wage workers and vocational training programs for the unskilled jobless are likely to be included in Olmert's plan, and meet broad support. Yet chances are that Olmert will be tempted to increase both spending and taxes because he arrived at the Treasury just as a nearly-negligible January-August deficit of NIS 1.8 billion was reported less than a fifth of the original plan, based on a 3.4-percent-of-GDP annual deficit target. We hope, but doubt, he will shun the temptation to treat this particular "surplus," and the general economic optimism and election-season atmosphere, as a license to embark on a spendthrift misadventure, rather than lowering taxes further, as Netanyahu said he would in response to such opportunities. Nobody should know the dangers this involves better than Olmert and the rest of the Likud, whose experience in economic populism is vast, recent and traumatic. Olmert should look to Silvan Shalom's performance in the Treasury this decade. Shalom, who dragged his feet on reform and at the same time expanded the deficit, soon saw the economy sink into its worst-ever recession and the shekel nearly collapse, reaching a historic low. Shalom, like Olmert, had reason to believe he was inheriting an essentially solid economy that could sustain the fiscal expansion he had in mind for it. What he failed to prepare for were external circumstances like the Nasdaq meltdown of the time and the 9/11 terror attacks. Now, with crisis already plaguing the global energy markets and with disengagement's costs exceeding original assessments by billions of shekels, Olmert risks repeating Shalom's mistake. To be successful in his job while also pursuing his admirable goals in fighting poverty, Olmert must seek long-term measures rather than short-term expediency, and be prepared to confront vested interests. This may mean locking horns with people like Defense Minister Shaul Mofaz, who presides over a famously bloated budget, or Infrastructure Minister Binyamin Ben-Eliezer, who is loath to carry out the government's plan to de-monopolize and privatize the oil refineries. As for his rivalry with Netanyahu, Olmert would do well to leave the economy out of it. In any case, it would hardly be to Olmert's political advantage to use as his model Shalom's failures rather than Netanyahu's successes.

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