Trajtenberg and fiscal responsibility

We must remember economic history’s painful lessons about the consequences of irresponsible spending.

Prof. Manuel Trajtenberg (photo credit: Mark Neiman / GPO)
Prof. Manuel Trajtenberg
(photo credit: Mark Neiman / GPO)
Several activists connected with this summer’s socioeconomic protests have voiced supreme displeasure with the Trajtenberg Committee’s recommendations released Monday.
Some of the criticism was characteristically vague, particularly among the younger activists.
There was much griping about how the Trajtenberg Committee had offered nothing more than “minor adjustments” to the economy’s ills and not the hoped for “revolution,” without specifying what this “revolution” would entail.
Others, such a Prof. Yossi Yonah, a member of Ben-Gurion University’s education department and head of the “alternative team of experts” set up to counterbalance the Trajtenberg Committee, were a bit more specific.
In an interview to Army Radio Monday, Yonah declared that “more far-reaching steps” were in order. The professor of education, fearlessly venturing outside his field of expertise, called to significantly increase the size of the public sector as a percentage of GDP.
In fact, attacks on the Trajtenberg Committee began weeks ago, long before the recommendations were even published, when Prof. Manuel Trajtenberg made it clear his committee would exercise fiscal discipline and would not call for a breach in state budget guidelines.
For Histadrut Labor Federation Chairman Ofer Eini, Trajtenberg’s commitment to fiscal discipline was proof that the committee’s recommendations, whatever they were, would be poorly inadequate. Instead, Eini called on the government to bankroll greater welfare benefits by adding at least NIS 20 billion annually to government expenditures.
Thankfully, Trajtenberg Committee members have ignored irresponsible figures such as Eini, Yonah and others on the economic Left who have failed to internalize the lessons of the Israeli economy’s short history.
Trajtenberg and his fellows are familiar, for instance, with the sort of excessive government spending fueled by a bloated and highly inefficient public sector that, together with other factors, led in 1984 to 450 percent inflation.
No one who knows anything about fiscal policy wants to return to the days when public-sector expenditures made up nearly 60% of GDP, compared to less than 43% today.
Implementation of the Stabilization Plan in July 1985 – which introduced, among other reforms, fiscal restraint – helped reduce inflation and prevent a collapse of the economy.
Trajtenberg and his fellows also recall how in the mid-1990s, an abandonment of fiscal discipline at a time when Israel was absorbing hundreds of thousands of immigrants from the Former Soviet Union led to doubledigit inflation and economic instability.
The severe economic downturn beginning in 2001 led to further fiscal cuts, particularly in welfare benefits. Though it can be argued that in some cases welfare cuts went too far, nevertheless, as a whole it was largely thanks to Israel’s responsible fiscal policies in the first part of the 2000s that helped the Jewish state weather the 2008 economic crisis.
Countries that pursued a less responsible fiscal policy, such as Greece, Spain, Portugal and Ireland, are now endangering the stability and integrity of the entire European Union.
While there is room for a measured reallocation of our limited budgetary resources – perhaps by cutting from our huge defense budget as suggested by the Trajtenberg Committee – we must be vigilant against breaching the fiscal framework.
Finance Minister Yuval Steinitz has set the ambitious goal of ensuring that the 2011 budget deficit does not exceed 3% of GDP, down from 3.7% in 2010. Back in February when the government – in a move that largely catered to populist sentiment – added NIS 1.1b. to the budget in the form of fuel tax cuts, public transport discounts and water tax cuts, Bank of Israel Governor Stanley Fischer was quick to warn the government to stick to its budget deficit goal for 2011.
Activists on the economic Left are correct when they declare that the Trajtenberg Committee’s recommendations are not revolutionary – that is precisely what makes them so laudable.
We do not need a radical revamping of our economic system.
This summer’s socioeconomic protests made a major contribution to Israeli society by bringing to the forefront, perhaps for the first time in such a forceful manner, the importance of socioeconomic issues.
But while there is room for reevaluating how we determine our society’s list of priorities in the form of fiscal budget expenditures, we must also remember economic history’s painful lessons about the consequences of irresponsible spending.
The Trajtenberg Committee certainly has.