Budget cuts? Yair Lapid, spending and hard-earned money

“Governments don’t reduce deficits by raising taxes on the people; governments reduce deficits by controlling spending and stimulating new wealth.” – US president Ronald Reagan

So after many zigzags and leaks to the media we finally get to see Finance Minister Yair Lapid’s budget. The headlines are screaming about the draconian budget cuts. In fact the Finance Ministry refers to this being the “biggest spending cut ever imposed.”

Well, let’s take a step back and see how this is smoke and mirrors. If this is the “biggest spending cut ever imposed‚” then I am the queen of England. According to Globes, “Government spending this year will be NIS 304.5 billion, 7 percent more than in 2012.” That’s an increase of about NIS 18b.! Some spending cut.

How can we have 7% more spending this year than last and yet everyone is talking about dramatic cuts? As a reminder, a few months ago I wrote: “What if I told you that the cuts really aren’t cuts at all, rather a slower increase in spending than originally planned? Chances are you would think I am crazy and some kind of anti-government zealot (you may be right about that regardless!).

“Let’s say that you make NIS 15,000 a month, and every year you expect to receive a 10% raise. This year your boss tells you that since the company isn’t doing so well you will have to make do with a 5% raise. Your new salary will be NIS 15,750, which according to all is more money than you made last year. This is how normal people view increases and cuts. If you have more than last year, it’s an increase; if less, a cut.

“Unfortunately, that’s not how the government views cuts and increases. For a government if you plan on spending NIS 25b. more than the previous year and end up spending only NIS 18b. more, you cut spending. Think I’m nuts – look at the details.”

It’s our money What makes this even more disgusting is that in the name of getting the budget deficit under control, everyone “must pay their fair share.” So we are all saddled with higher income, VAT and corporate taxes, not to mention taxes on investment properties. This is nonsense and will harm economic growth. We are being hit with higher taxes to provide a fix for the government’s addiction to spending. These higher taxes are estimated to bring in about NIS 8b. That means Lapid could have raised spending by about 2.5% over 2012 (which is more or less the impact of inflation) and not raised taxes one iota. There is absolutely no need to raise any taxes. Where is the outcry? Where is the media asking these questions? I realize that he is one of them, but someone needs to call him on this.

Want to balance the budget? The solution is twofold.

As I have written: “Truly cut spending buy 2%-3% across the board, without harming social services, by cutting fat, streamlining bureaucracy and encouraging the various ministries to be responsible with taxpayers’ money. For example, how often do we see a rash of roadwork at year’s end to use up the remaining transportation budget. Why not reward ministers who actually do a good job of not spending all our money and making do with less.”

But it’s not just about real budget cuts. You also need economic growth. There has been no talk whatsoever about policy to grow the economy. Lapid needs to do the direct opposite of what he is proposing: Incentivize job creators, lower taxes, encourage investment, let everyone take home more of their hard-earned money and watch the economy flourish. Why does he think that punishing business is going to provide more revenue over the long run? No society has ever been taxed into prosperity. A strong economy will provide much more revenue over time than these tax increases will ever do.

The combination of REAL budget cuts along with encouraging economic growth will lead to a balanced budget – and most importantly, the Israeli citizen will benefit.

aaron@lighthousecapital.co.il

Aaron Katsman is a licensed financial adviser in Israel and the United States who helps people with US investment accounts.