Is Israel's two-year budget to blame for deficit?

Expert derides Israel’s budgeting process as recipe for disaster; PM dismisses deficit’s importance, vows to prevent tax hike.

Hebrew U Prof Avi Ben-Bassat 370 (photo credit: IDI)
Hebrew U Prof Avi Ben-Bassat 370
(photo credit: IDI)
The proximate cause of the 4.2-percent budget deficit for 2012, which far exceeded the 3% target, may have been slower-than-expected economic growth, but experts are citing a more direct reason for the fiscal failure: Israel’s two-year budget.
When Finance Minister Yuval Steinitz introduced the two-year budget in 2010, he said the innovation would bring economic stability. The thinking was that if the private sector knew what taxes to expect, if government agencies knew what kinds of budgets they would be working with, if people knew what chunk of their paychecks the government would get, and if the Knesset could cut half of the budget haggling, everyone one win.
While some politicians derided it, international onlookers from the IMF and OECD praised the innovation.
According to Hebrew University Prof. Avi Ben-Bassat, a senior fellow at the Israel Democracy Institute and scholar at the Center for Academic Studies, Israel’s inability to predict long-term economic conditions makes the budget disastrous.
“There is no other country that has a dual-year budget. Why? Because it requires long forecasts,” Ben-Bassat told The Jerusalem Post on Monday.
The predictions for economic growth and tax collection for the past year’s budget were made two-and-a-half years earlier, in the summer of 2010. Simply put, Ben-Bassat says, “they were wrong. Very wrong.”
Ben-Bassat noted that although Israel’s hearty growth started consistently declining in the second quarter of 2011, the old estimates were not revised because of the inflexible budget.
“It doesn’t make sense for policymakers to tie their own hands,” he said. “The finance minister said he wanted to give certainty to the private sector, but he provided just the opposite. It actually created uncertainty.”
Prime Minister Binyamin Netanyahu on Monday downplayed the significance of the deficit, saying it was only a fraction of a percentage point away from more recent estimates.
“We had a deficit in 2009 also,” Netanyahu said in a Channel 2 interview. “So what?” The prime minister also responded to former prime minister Ehud Olmert’s recent accusation that Netanyahu spent an unnecessary NIS 11 billion on the Iranian threat by saying he was “proud” that the defense expenditures made Israel more secure.
Though Netanyahu refused to lay out specific cuts for the 2013 budget despite being pressed several times, he was steadfast on one point.
“I don’t want to raise taxes,” he said. “I’ll do everything in my power to prevent it.”
Ben-Bassat doesn’t make much of that promise. When asked if the government would have to raise taxes after the election, he replied, “Certainly. You can’t continue with such a large deficit. We have to get back down to 3%, so we need another NIS 15b. or so.”
And unlike the prime minister, Ben-Bassat has some concrete proposals.
In his view, the proportion of deficit-cutting measures should be about two shekels in cuts for each one raised in extra revenues.
But the tax burden is already too high, he said, so new revenues must ensure tax hikes don’t hit the country’s growth or undermine its weakest sectors.
“You cannot increase an individual’s income tax because it’s high enough already,” he said.
“You can’t raise indirect taxes [such as the value-added tax and sales tax] because they are very regressive. The lower your income, the higher the burden is percentage-wise.”
So who is left to tax? Well, said Ben-Bassat, there are huge amounts of tax revenues – to the tune of NIS 39b., the exact size of the 2012 deficit – that are lost to exemptions.
“Part of the exemptions are justifiable,” he said, “but some are just protectionist. They don’t accomplish anything economic.”
Exporters, he said, are exempted from some NIS 10b. in taxes, paying a fraction of what others do. Half of that exemption could be eliminated.
Another anomaly: Eilat is exempted from a variety of taxes to encourage tourism, although many other tourist destinations are not. Exemptions linked to outdated, poorly regulated study funds also could bring in NIS 2.4b.
“You can solve the problem in a way that doesn’t hurt so much,” he offered.
On the cutting side, Ben-Bassat expected that NIS 3b. could safely be cut from the defense budget, but saw the bigger fiscal threat in haredi yeshivot.
“I have nothing against haredim,” he said, “but I don’t think we need to support those who don’t want to work.” “The weight of the haredi population is growing, and if we accept them not working, the GDP per capita here will go down.”
Instead of monetary incentives not to work, he said, the government needed to incentivize economic productivity.
When asked what political party offered plans closest to his, Ben-Bassat froze up.
“I’m exasperated from the campaigns and this election,” he said. “I know what needs to be done, but I don’t know if it will actually happen.”