Competing Committees

The Trajtenberg Report and the Yonah-Spivak Report present different visions for Israeli society.

By ZIV HELLMAN
PM Netanyahu with Prof. Manuel Trajtenberg DONT USE (photo credit: Flash 90)
PM Netanyahu with Prof. Manuel Trajtenberg DONT USE
(photo credit: Flash 90)
In the days just prior to Rosh Hashana, the Jewish New Year, two separate committees of economists rushed to publish reports containing differing economic reform recommendations, in the wake of the massive protests that shook the country over the summer. The passionate responses to the two reports reveal that the hopes, rage, demand for change and backlash, all stirred by the protests that brought hundreds of thousands of demonstrators to Israel’s streets, have not died down.
The Trajtenberg Report, issued by the Committee for Socioeconomic Change but commonly referred to as the Trajtenberg Committee because it was chaired by Tel Aviv professor of economics Manuel Trajtenberg, was commissioned by Prime Minister Benjamin Netanyahu on August 8 in order to provide the government with recommendations for reform in easing the financial burdens borne by many Israelis, changes in the taxation system, improvements in public services, increasing market competition, and finding ways to lower housing costs.
In response to the establishment of the Trajtenberg Committee, the leaders of the protest movement established their own unofficial ‘shadow’ committee of experts, headed by Yossi Yonah, professor of education at Ben-Gurion University, and Avia Spivak, professor of economics at Ben-Gurion University and former Deputy Governor of the Bank of Israel. The Yonah-Spivak Committee looked at many of the same topics as the Trajtenberg committee, but from an ideological perspective that differs widely from the “establishment-oreinted” Trajtenberg Report.
The Trajtenberg Report is touted by its supporters as one of the most significant packages of economic reforms in years; its detractors contend it is merely a whitewashed cooptation of the demands of the summer’s protestors. The Yonah-Spivak Committee’s recommendations, according to its supporters, would bring about a major shift in the underlying economic ideology of the country. Its detractors contend that its recommendations are unreasonable and cannot be feasibly implemented, especially in the current international economic climate.
At the most basic level, the two reports represent different visions of whether or not Israel should move away from what some refer to as a ‘neoliberal’ approach and strive instead for “social solidarity” and “social welfare.” The Trajtenberg Committee regards the outlines of the current socioeconomic structure as sound but requiring major renovation. The Yonah-Spivak Committee takes a more radical view in favor of deeper change.
“The Trajtenberg Committee report is entirely couched in language that supports the current system,” says Yonah. “Our teams in effect challenge the system. We believe that the conception of what counts as ‘social justice’ needs to change here.” In response to criticism that implementing his committee’s recommendations word for word would constitute too sharp a rupture for the economy to undertake at once, Yonah tells The Report that he regards his committee’s report as “a practical ideal that we should aspire to. It may not be implementable immediately word for word, but it is feasible, not a fantasy.”
Only 50 days passed between the commissioning of the Trajtenberg Committee and the publication of its report on September 26. Yet its members managed to compose a 267-page tome covering a vast number of subjects in depth. It is so comprehensive that summarizing its recommendations is a formidable task. With its wide recommendations for economic reform, in topics ranging from tax rates, education, and labor laws to housing reform, anti-trust regulation, transportation and health spending, it is the only result so far to have emerged from the summer’s demonstrations that has the full attention of political decision-makers in the government and the Knesset.
In the press conference announcing the publication of the committee’s report, Trajtenberg provides a lengthy analysis of the main socioeconomic difficulties that the committee identified in Israeli society. The analysis is based on several meetings that committee members conducted with demonstrators around the country, in which the public was invited to speak freely about what had motivated the protests. He discusses three main elements: first, the economic difficulties that educated and skilled working families face in meeting their needs, their concerns for the future, and the feelings of injustice they bear; second, economic concentration and its effects on the economy; third, declining investment in government services and a feeling of estrangement from government institutions that is widespread in the public, to the point that they feel “no one is listening.”
When Trajtenberg accepted the suggestion to head the committee, he requested that the government impose no limitations on its potential recommendations, but he did accede to one – he accepted the condition that the committee recommendations maintain budgetary discipline by not increasing the budget deficit. Since the recommendations imply increased spending of 30 to 60 billion shekels over the next five years, that meant finding sources. Tax increases would cover much of that, but Trajtenberg also proposes a permanent contraction of the baseline of the defense budget by 2.5 billion shekels.
This would indicate a major change of priorities, since Israel’s defense budget has always been considered sacrosanct and offlimits.
The recommendations that are likely to have the greatest impact include increased taxes, mostly on corporations and the wealthy; housing reforms, especially renewed public housing and the construction, for the first time, of housing for the rental market; free public education from the age of 3 (this was mandated by law in 1999, but implementation has been repeatedly postponed due to objections by the Finance Ministry); defense spending reductions to pay for greater civilian spending; better implementation of labor laws; expanded state-subsidized senior care; and increasing anti-trust regulation.
In addition, the committee recommends that students and eligible individuals (based on National Insurance Institute data) be granted a 50 percent reduction on bus and train tickets. Furthermore, bus frequency should be increased by a third. Part of the increased costs this would engender could be recouped, according to the committee, by removing the monopolies that the Egged and Dan cooperatives enjoy in exchange for running these lines.
The proposed tax increases include a rise in corporate tax from 24 percent to 25 or 26 percent, reversing several years of reductions in the corporate tax rate, which was slated to go down to 18 percent next year. The recommendations also include increasing capital gains and dividend taxes to 25 to 30 percent, up from 20 percent. In addition, if the report’s recommendations are accepted, the highest tax bracket will go up from 45 percent to 48 percent – except for the wealthiest, defined as those whose annual income, whether from capital or work, is more than a million shekels, who would get slapped with another 2 percent, effectively raising their tax bracket to 50 percent.
To the surprise of many, the committee proposed no change in the value added tax, an unpopular tax because it is regressive and directly hits consumption. Given that each percentage reduction of value added tax translates into 4 billion shekels less state revenue, while the benefits of that reduction are not entirely focused on mid-to-lower income earners, the committee decided that there were other tax reforms with higher priority.
Opposition among the protesters and in the Knesset wasted little time to attack the Trajtenberg Report almost as soon as it was published.
The leadership of the protest movement contends that the committee’s report calls for too minor a reform relative to the sweeping changes that they envisioned. Politicians from the Knesset opposition also fault it for doing too little to count for what they regard as true reform.
Shelly Yacimovich, the newly elected chairwoman of the Labor Party, says the report is a major disappointment.
“The report is a cynical exploitation of the protest movement for deepening capitalist policy,” says Yacimovich in a press statement.
“The Trajtenberg committee recommendations are part of the same malady that caused increasing income gaps, the collapse of the middle class, and poverty among working people. They are not a cure for these ills… Permitting uncontrolled imports will puts thousands out of work and destroy Israeli industry.”
At the other end of the socioeconomic spectrum, Shraga Brosh, president of the Manufacturers Association of Israel, also finds much in the committee report with which he disagrees. “I call on the Prime Minister to reject the Trajtenberg recommendations,” he writes to The Jerusalem Report via his spokesman Yoash Ben Yitzhak.
“Hidden within the recommendations are significant traps that may be destructive to industry and the entire economy. They implement the wildest dreams of Finance Ministry officials, which have been rejected for years and filed away as delusional. The cries for ‘social justice’ are liable to be replaced by cries of ‘give us bread and work’.”
In citing what he sees as the greatest threats to the economy, Brosh does not mention the Trajtenberg Committee’s recommendation that corporate taxation be increased significantly, but points instead to the recommendations that import restrictions be lifted for the sake of increasing competition and lowering consumer prices. “A country that wants to live does not harm the productive sector that drives its economy,” he writes. “Trajtenberg recommends opening the economy to unfettered imports that will greatly harm industry. He also recommends irresponsible cuts in the defense budget, which will also damage industry, including hundreds of manufacturing plants on the country’s periphery.”
A day after the publication of the Trajtenberg Committee report, the Yonah-Spivak Committee issued its own competing report. Spivak directly criticized the Trajtenberg Committee report, stating that it recognizes “a need to make a 180-degree turn, but apart from a certain change in taxation – there’s nothing.”
The Yonah-Spivak recommendations go much further than Trajtenberg’s, and include expanding mandatory education to cover all ages, down to infants; increasing social security allowances; expanding the state health services budget; constructing public housing at a cost of 3.3 billion shekels; and increasing the education budget by 2 billion shekels.
The Yonah-Spivak Committee foresees paying for all these added expenses by large tax rises – hiking the marginal income tax rate to 55 percent, capital gains tax to 40 percent and corporate tax to 31 percent.
“Trajtenberg stresses classical capitalist positions, giving each person a reward for what he or she produces,” Yonah tells The Report, in seeking to explain the main underlying difference between his committee’s report and the Trajtenberg Committee report. “This is something that is certainly important and that we agree with. But our starting point is that first we need to ensure basic rights and entitlements to everyone. That is the first level of justice. Then we can go on to the second level of justice, in which people may get more if they produce more.”
Yonah goes on to interpret the Trajtenberg Report as essentially stating that the market economy has failed because it is not fully efficient; therefore, we should make it more efficient by breaking monopolies and increasing privatization and competition.
He contrasts that with his committee’s view that rushing into more privatization is the wrong response. “We propose a moratorium on privatization,” he says. “We need to learn the lessons of past failures before we go that route again.”
Joseph Zeira, a Hebrew University professor of economics who is a member of the Yonah-Spivak Committee, tells The Report that he agrees with the basic diagnosis offered by Trajtenberg but “would put it in more political terms.”
“There is increased income inequality in Israel over the last twenty years,” says Zeira.
“This increased inequality leaves behind not only the middle class, but also the lower classes as well. Just a brief statistic: in the last decade output per worker increased by 9 percent, while wages went down by 5 percent.”
Zeira says that there are many reasons for increased inequality, but also blames government policy. “Reducing public services and privatizing other services contributed significantly to the widening income gaps,” he says. “But the protests opposed these policies not only because they have hurt them personally, but because these policies hurt their sense of solidarity. Indeed, the decline of solidarity was the main trigger for the burst of the protests, and it seems that their main goal is to rebuild this solidarity back from scratch.”
There is a widespread public conception that one of the main differences between the Trajtenberg Committee report and the Yonah-Spivak Committee report stems from the willingness on the part of the latter committee to increase the state budget deficit for the sake of attaining social welfare goals.
Zeira vehemently responds that is a misconception.
“This is completely wrong!” he exclaims. “The Yonah-Spivak reports are completely against expanding the budget deficit. We suggest increasing public expenditures by 2.5 percent of GDP, and to finance it by raising various taxes and eliminating other tax loopholes, mostly for capital income and for high salaries, which together raise public income by 2.5 percent of GDP as well. Thus, the Yonah-Spivak reports adhere to fiscal discipline just as the Trajtenberg report does. The difference between the two reports is that while we suggest increasing both expenditures and taxes, the Trajtenberg report refuses to increase expenditures at all. Hence, the increases it offers to some social services are made possible only by reducing other expenditures, namely in defense. This explains why the Trajtenberg report can offer fewer public services. “
The widespread misconception, according to Zeira, is due to a misunderstanding of technical terms. “Our debate with Trajtenberg is not on the deficit, but on what is called in Israel the “expenditure rule. This is a law that restricts the rise of expenditures so that they rise by less than GDP . Since the common measure for the scale of government is expenditures relative to GDP , that means that the Israeli public sector is decreasing and will keep on decreasing for the foreseeable future.”
The public sector has, he notes, decreased in the last decade by more than 8 percent of GDP. “It is this rule that we oppose, while we are very loyal to keeping the budget balanced. We believe that our recommendations are very good, very responsible and quite moderate.”
Finally, Zeira stresses that the differences between the two reports are not only technical, “but in principle as well. While the Trajtenberg report focuses mainly on “social justice” and fairness, the opposite team presents a wider philosophy of solidarity and political inclusion.
“We talk about making public services more equal to all the population, not only to the middle class, but to the periphery, to the Haredi Jews, to the Arabs – in short to all,” sums up Zeira. “Furthermore, we claim that the reform should not be only at the budget level, but also in the labor market. We recommend stopping outsourcing of services in the public sector and giving power to unions. We talk also about support to the low-salary earners, but also discuss changes in minimum wages, in [policy towards] foreign workers, etc. We believe that the protest wave is largely about solidarity and hence it is reflected in our reports.”
Yonah points to the different approaches of the two reports toward the relative role of government as being fundamental. “The trend in Israel has been toward gradually reducing government expenditure relative to GDP ,” he says. “Trajtenberg would continue that trend. But Israel is among the countries in the OE CD that spends the least on public services for citizens. It is very important to change that with respect to education, health and other essential services. Public expenditure is currently 42 percent of GDP . It should be raised to 50 percent.”
Immediately after its publication, Netanyahu and Finance Minister Yuval Steinitz declared their support for the Trajtenberg Committee report. But getting those recommendations accepted by Netanyahu’s coalition, based largely on parties with sectoral interests, was not easy. His advisers hyped that Netanyahu was embracing Israel’s new social change movement, even though many of them contradict much of his own deeply held, neo-liberal economic ideology and his political loyalties to capital interests. But when, on October 3, Netanyahu convened a cabinet meeting to approve the recommendations, he met with humiliating and abject failure as a clear majority of his own government voted against adopting the report’s recommendations.
The social protesters jeered. The press and political opposition opined that the prime minister was losing control. Yet less than a week later, on October 9, after feverish meetings with his coalition members, Netanyahu managed to get the report adopted in a repeat vote in the government with a handy majority vote of 21 government ministers in favor and only 8 opposing – this time, amid ongoing speculation in the media regarding what, exactly, Netanyahu promised the recalcitrant ministers in order to agree, while the protest movement vowed to return to the streets after the holidays.
The most significant opposition to the Trajtenberg Committee recommendations from within the coalition has come from Shas, the ultra-Orthodox Mizrahi party. The four Shas members of government voted against adopting the report in both of the votes.
“It is very clear why Shas is so opposed,” Avner De-Shalit, professor of political science at Hebrew University tells The Report.
“The Trajtenberg report contains a plan to get Haredi men working, to make them economically productive. That does not sit well with Shas.
“In addition,” continues De-Shalit, “consider that for many years, no public housing was built in this country. Nothing. The only ones who have been receiving housing at reduced, subsidized prices, have been the Haredi public. Trajtenberg’s committee recommendation will change that.”
Netanyahu will still have to go through numerous political hoops in the Knesset before the Trajtenberg recommendations become law, all the while trying to prove that he has become a “socially committed prime minister” while the very protesters – with whom he claims to sympathize – intend to oppose his every move.
The report’s recommendations cover such a wide array of subjects that they will have to be split into several different legislative bills, each of which will be voted on separately in the Knesset plenum. That makes it easier for the opponents of a particular provision to vote against it without appearing to shoot down the entire Trajtenberg economic reform project.
Zeev Elkin, a Likud MK and chairman of the Likud caucus in the Knesset, is keeping a close eye on attitudes towards the Trajtenberg report among the various factions in the Knesset. “The Haredi parties have expressed opposition because the proposed conditions for eligibility for housing assistance [such as employment on the part of both parents in families seeking assistance] run counter to the interests of their constituents,” says Elkin.
“Shas has been pushing for a much bigger, more comprehensive expansion of public housing. Ehud Barak, Defense Minister and head of the Independence Party (which split off from the Labor Party earlier this year) and Yossi Peled, Minister without Portfolio for the Likud, are concerned about the effects that cutting too deeply into the defense budget could have.
“We can expect Knesset Members to bring up various other objections as the bills are brought for debate in the Knesset,” Elkin says, yet nevertheless tells The Report that he is optimistic that the Trajtenberg recommendations will eventually pass in the Knesset.
“These recommendations will bring substantial improvements to low- and middle income Israelis,” he asserts. “We are talking about additional spending of 30 billion shekels [in social benefits] over five years, out of which perhaps as much as 10 billion shekels will be front-loaded to the first year.
That is a serious amount of money. If the recommendations become law, families with young children stand to gain 1,500 to 2,000 shekels a month. Families with elderly members will save hundreds of shekels a month in expenses. We should not make them wait while we argue about whether or not this is good enough.”
Elkin regards the fact that Netanyahu managed to get nearly all the Likud government ministers to support the adoption of the Trajtenberg report in the second vote, along with the Russian immigrant party Yisrael Beitenu, as an indication that he is likely to muster majority votes in the Knesset, even without the support of the Haredi parties.
If the Trajtenberg Committee recommendations are eventually adopted in the law books by the Knesset, the impact on the economy will likely be substantial, even if many are disappointed that the reforms do not go far enough, for example, free education for children as young as three. Despite his Ministry’s past opposition, the Finance Minister himself is now so loudly behind the Trajtenberg recommendations that it is difficult to imagine that the Ministry will be able to block it. To take another example, housing projects constructed explicitly for rent have not existed in this country since the British Mandate. If and when they become a reality, it will mark a major change in the national housing market.
The extent to which Netanyahu so quickly and readily embraced Trajtenberg policy recommendations that contradict policies he had been pursuing virtually his entire career – Netanyahu has in the past steadfastly insisted on a series of reductions in corporate tax rates, even when senior officials in the Finance Ministry regarded the cuts as going too far – has raised some eyebrows. That Netanyahu and Steinitz not only embraced the recommendations but made major efforts to have them adopted by the government against initially stiff opposition reveals how deeply the recommendations have the potential to shake vested interests.
“I am surprised that Netanyahu is so enthusiastically backing the Trajtenberg recommendations,” says De-Shalit. “It is even disappointing in a way, because I want to believe he has a firm ideological line. I admired the way he stuck firmly to his ideology in the past, even though I completely disagree with it. Let’s see what happens. He may adopt the recommendations now and then find a way to make them erode and dissolve away [into insignificance].”
The Yonah-Spivak commi ttee report is scheduled to be given a public hearing in the Knesset Finance Committee. But it is the Trajtenberg Committee report that is the official report adopted by the government, and the one that will be considered for legislation. The members of the Yonah-Spivak Committee and the leaders of the protest movement know that full well. The protest movement leadership has vowed to go back to the streets if the Yonah-Spivak report is not adopted, but the momentum of the summer marches and tent encampments is gone, at least for now, and it is unclear what direction the protest will take in the near future.
Yonah tells The Report that he hopes that, at the least, the protest movement will put in place a broad infrastructure that it can have at its disposal for future activity. He sees parallels between the Israeli protest movement and similar movements in Europe and North and South America, including the Occupy Wall Street movement that has recently spread in the United States. “What these worldwide movements are saying is that the neo-liberal system keeps leaving more money in the hands of the rich, at the expense especially of the middle classes,” says Yonah. “I like what I heard from our young people, their commitment to solidarity and participatory democracy. There is a paradox in Israel, a split personality, between our national solidarity, with the stress on our history and the fight against enemies, and at the same time the atomization that has taken place at the socioeconomic level.”
“We want to aspire to justice,” concludes Yonah. “It is feasible to get to justice here. But it will require shifting our ideological position.”