Judging by his situation in the polls, Moshe Kahlon’s economic populism has failed to deliver the political goods.
By AMOTZ ASA-ELFinance Minister Moshe Kahlon(photo credit: MARC ISRAEL SELLEM)Like his biblical namesake, Finance Minister Moshe Kahlon has journeyed to the Promised Land’s doorstep only never to march through its gate.A self-made man raised in slummy Givat Olga with five siblings by penniless immigrants from Libya, the 58-year-old finance minister has spent four years wrestling with the approaching election’s forgotten hero – the economy.The result, a political meteor’s evaporation, underscores the Israeli economy’s merits and drawbacks, and also the futility of the economic populism with which Kahlon chose to toy.The economy would likely have been this election’s main issue if not for the prime minister’s legal entanglements, which redefined it as a vote of confidence in Benjamin Netanyahu and, arguably, in the judiciary with which he is now locking horns.Voters were set to think economically because the regional affairs that in the past guided their electoral choices retreated in recent years to the back-burner. With most Israelis skeptical about the Palestinians’ desire to make peace, and with civil wars besetting the Arab world while the Iranian threat is a matter of consensus – Israel’s foreign affairs are not really a political bone of contention.The economy is.THE OUTGOING government’s economic report card is far from damning. The vitality that has characterized the Israeli economy for more than 15 years is still there.Israeli GDP grew last year by 3.2%, second among the world’s 36 most developed economies only to Poland’s 5.1%. Unemployment tumbled to a minimal 4.1%, inflation rose by a negligible 0.8%, and per-capita foreign currency reserves, at more than $13,000, are the sixth-highest in the world.Then again, the shekel last year depreciated by one tenth, as it slid from a rate of 3.39 to the dollar when the year began, to 3.71 when it ended. It was the financial markets’ way to voice their concern over Israel’s creeping loss of fiscal discipline under Kahlon’s economic command.True, the shekel has since rebounded, appreciating in 2019’s first two months by 3%, reflecting non-Israeli developments like concerns for a recession in the US, and Israeli developments like new Bank of Israel Governor Amir Yaron’s hawkish statements concerning monetary policy, or Intel Corporation’s decision to invest a further $40 billion in its already elaborate Israeli operation. Even so, in his eagerness to impress low-income voters, Kahlon accelerated spending, so much so that in January it turned out the budget deficit had climbed over the previous 12 months to 3.3% of GDP, thus breaching the government’s stated goal of 2.9 %.Moreover, whereas Israeli governments had previously finished the specific month of January with fiscal surpluses, in this year’s first month the outgoing government spent 800 million shekels more than it earned, as opposed – for instance – to January 2018, which it ended with a 4.7 billion shekel surplus.Much more tellingly, total public debt, which, since Netanyahu’s return to power a decade ago declined steadily from 80% of GDP to 60.5% at the end of 2017, last year reversed course and inched up to 61.2% of the GDP.Lurking behind these numbers is Netanyahu’s political formula, which made him install a finance minister whose economic tenets and political needs were different, and at times antithetical, to the prime minister’s.NETANYAHU’S political formula is to grant even the most sensitive cabinet portfolios to coalition allies. That is how the Treasury was handed to Kahlon, after his Kulanu Party won 10 seats in the last election. That is also how the Defense Ministry went to Avigdor Liberman and the Education Ministry went to Naftali Bennett, each of whom won even fewer seats than Kahlon.That is how the fiscally conservative Netanyahu compromised his economic conviction and handed the economy’s stewardship to the populist Kahlon. Labor, by contrast, during the 30 years in which it was the political hegemon, always kept these key portfolios in its hands, as well as the Foreign Ministry, which Netanyahu had also outsourced in the past (to Liberman).As a populist, Kahlon was driven not by a rigid ideological road map, whether the Thatcherism that drove Netanyahu, or the Keynesianism that drove David Ben-Gurion when he made the government own and run about two-thirds of the economy.Kahlon did promote competition, which he had championed already in his days as the communications minister who slashed cell-phone rates by breaking that industry’s cartel. That is why as finance minister he forced the banks to shed their credit-card activity, and that is why he also set out to lower dairy food prices by lowering duties on imported milk products.Eager to benefit the working-class constituency that is his electoral focus, minimum wages gradually rose during Kahlon’s tenure nearly 25%, from 4,300 shekels to 5,300 shekels. However, when it came to structural reforms Kahlon’s populist quests proved self-contradictory.Kahlon left the broader system he inherited pretty much intact, including tax rates which he left unchanged, other than Value Added Tax, which he reduced from 18% to 17%. At the same time, in remodeling the Electric Corporation’s monopoly, he produced a compromise which served its workers well, but less so the broader public.Notorious for its celebration of tenured jobs, nepotism, overpay, and perks like free electricity, IEC’s bloated workforce of some 8,600 will shrink, according to Kahlon’s deal, by 25%, mostly through early retirements, while only five of its 17 power stations will be sold to private competitors.Besides all this hardly passing for privatization, the reform also promises that the privately run power stations will hire employees leaving IEC, albeit without the benefits they previously enjoyed.It was the kind of reform that populism allows. Having refused to confront IEC’s powerful union, Kahlon ended up with a mild reform whose costs prevented a cut in ordinary households’ electricity bills. In other words, the same populism that stopped Kahlon from confronting several thousand pampered workers prevented him from pleasing the millions of citizens those same workers had abused.Kahlon’s populism became altogether unbridled last fall, when he heeded Israel Police’s demand that he raise its employees’ wages and pensions by an annual 600 million shekels which, when combined with retroactive payments the deal entails, adds up to 15 billion shekels over the next 15 years.The immediate financial cost of this gesture is high by any yardstick, but becomes altogether alarming when considering its potential domino effect, as it gives reason to practically everyone else in the public sector – from teachers and nurses to professors and diplomats – to make similar demands.Kahlon’s recent predecessors, certainly Netanyahu when he was finance minister last decade, would have flatly rejected such a demand. Even so, Netanyahu approved the move that violated his own thinking, whether because he was in no political position to block Kahlon, or because he wanted him to be seen as a populist damaging the economy.The gap between both men’s economic outlooks was most glaring in Kahlon’s quest to lower the legally required down payment for first-time mortgage borrowers, from 25% to 10% of the price of the purchased apartment.Kahlon never got to pass this reform, but it is eerily reminiscent of how last decade’s subprime crisis began in the American housing market.The housing market, to be sure, is where Kahlon was tested more than anywhere else. Housing prices nearly doubled over the last decade, reflecting Israeli birth rates, which are the highest in the developed world.Kahlon set out to lower housing prices in various ways, including speeding licensing procedures to expand existing apartment buildings; offloading more state-owned real estate to the market; and auctioning out real estate to contractors who promise the lowest retail prices.In a four-year retrospect, the potion seems to have been well-mixed, but under-dosed. The incessant rise in housing prices has been stemmed, and in 2018 it was in fact reversed, with average prices declining 1.4%. However, the average flat’s average price remains exorbitant for a young couple, equaling more than 10 years’ worth of a gross average salary.This, in brief, is the backdrop against which polls indicate that Kahlon’s electoral following has been halved, and might in fact not even suffice to cross the electoral threshold.This apparent meltdown is beside the fact that Kahlon has lost some of his faction’s key members, including former ambassador to the US Michael Oren, former Jerusalem deputy mayor Rachel Azaria, and two people Kahlon made ministers, Yoav Gallant, who defected to Likud, and Avi Gabbay, who joined Labor (and became its leader).Judging by his situation in the polls, Kahlon’s economic populism has failed to deliver the political goods. He may have won over some of the cops and Electric Corporation workers he prized, but he did not impress the mainstream electorate, through which he hoped to ultimately succeed Netanyahu.Apparently, the economy’s healthy foundations are attributed to Netanyahu, while Kahlon has failed to establish his image, for better or worse, as a major shaper of its structure and direction.That is clearly what Netanyahu insinuated when he attacked Likud’s main rival in this election, the Blue and White Party, for enlisting Avi Nissenkorn, chairman of the Histadrut, as one of its Knesset candidates. “They will destroy the economy,” Netanyahu said of Blue and White, while suggesting Nissenkorn will be their finance minister, and thus undo the capitalist economy that Netanyahu shaped during the last decade.A lawyer and labor law specialist, Nissenkorn forced big companies to hire disabled employees, raise pension deductions, and to salary cleaning workers previously paid by the hour. At the same time, he was Kahlon’s ally in the deals he struck with Israel Police and the Electric Corporation.Netanyahu’s targeting of Nissenkorn, while paradoxical – it was his own government that waltzed with the union leader – has been effective. Blue and White is hiding Nissenkorn, stressing instead Gantz’s running mate Yair Lapid’s record, as the conservative finance minister who balanced the budget that his successor, Kahlon, breached.Had it not been for Netanyahu’s personal situation, this election would have been about Kahlon’s record in general, and particularly in housing and transportation.With commuters wasting precious work hours in daily traffic jams, all understand that the feverish construction of highways and interchanges of recent decades must now be followed by a massive overhaul of the public transport system.The effort is underway, with a subway being built in Tel Aviv, and a fast train that will later extend to Tel Aviv now running experimentally between the capital and Ben-Gurion Airport. Still, the jams are a major economic affliction, and the railway system’s daily malfunctions are a national scourge.The joint ticket Gantz managed to cobble together with Lapid and former defense minister Moshe Ya’alon has so far, according to the polls, attracted many voters from the Zionist Union, but hardly any from the Likud and its satellites.The key to electoral breakthrough might lie in an economic vision of the sort with which Rabin last century debilitated the Likud. In today’s conditions, such a game changer would mean a blueprint for a public transport revolution, replete with milestones, deadlines, and earmarked budgeting.Whether such a move transpires, and what its impact might be, remains to be seen. What does not remain to be seen is that Kahlon’s populist gambit, rather than mold a prime minister, produced much economic perplexity, and one political grave.
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