Sacrificing long-term benefits for short-term gains

Lapid is caving on vital reforms. But it’s Netanyahu who maneuvered him into a job he can’t handle

Histadrut chair Ofer Eini at Labor Court_311 (photo credit: Marc Israel Sellem)
Histadrut chair Ofer Eini at Labor Court_311
(photo credit: Marc Israel Sellem)
Finance Minister Yair Lapid rightly took flak last week for seeking to increase the 2013 deficit target from 3% to 4.9% (he subsequently retreated to a still excessive 4.65%). Yet his critics overlooked two important points. First, if leaks emerging from the Finance Ministry are correct, that wasn’t even Lapid’s worst move of the week. And second, though he is certainly responsible for his own mistakes, the blame rests at least as much, if not more, with Prime Minister Binyamin Netanyahu.
The deficit fiasco alone would raise grave doubts about Lapid’s fitness for his post. A higher deficit means billions of shekels out of all our pockets, because the more the government borrows, the more interest it must pay on its loans. Even at the same interest rate, payments on, say, NIS 45 billion would be 1.5 times those on NIS 30 billion. And often, the rate rises when you borrow more, swelling the payments even further.
The sums at stake are enormous. As Israel Hayom’s Hezi Sternlicht noted, “Israel had to pay 129 billion shekels ($36 billion) in 2012 to service its debt … Roughly speaking, this is equivalent to the combined budgets of the Defense Ministry and the National Insurance Institute.” Raising interest payments even further would thus necessitate even higher taxes or deeper cuts in other government programs.
Moreover, painful budget cuts are easiest right after a new government is formed. That’s when the government is strongest, because coalition members won’t yet risk bringing it down and calling new elections. That’s also when cuts are least politically damaging, because the economy has plenty of time to revive before the next election. Thus a government that can’t do serious cost-cutting in its first year is unlikely ever to do so: It will only be harder next year.
Nevertheless, a higher deficit could be justified if the money were used to fund serious economic reforms that would pay major dividends down the line. And the treasury had been discussing several such reforms.
But if leaked reports are true, Lapid has now scrapped most of these plans. Thus not only is he doing too little to reduce the deficit, but the steps he is taking are short-term fixes that will do nothing to improve Israel’s long-term economic health.
Under an emerging deal with Histadrut labor federation chairman Ofer Eini, Lapid has reportedly ditched plans to tax kranot hishtalmut (advanced-study funds) and enact legislation prohibiting strikes at state-owned monopolies like the airports, seaports and electric company, as many other Western countries have done. In exchange, Eini reportedly agreed to an 18-month postponement in certain payments to public-sectors workers (a previously agreed-on 1% raise plus half the annual clothing and convalescence allowances).
But postponing payments doesn’t actually cut government expenditures at all: It merely kicks them down the road, thus artificially lowering spending this year but increasing it in subsequent years.
In contrast, taxing kranot hishtalmut (which are currently tax-free) would increase revenues every year, thus improving the state’s long-term fiscal health. It would also eliminate an unfair distortion in the market: Kranot hishtalmut are just long-term investment funds to which employers and employees both contribute; there’s no good reason why some Israelis should be able to invest in the capital markets tax-free while others – those whose employers don’t provide this benefit – must pay capital gains tax.
But the concession on the anti-strike law is much worse. According to the International Labor Organization, Israel loses more time to strikes than almost any other Western country. In 1999-2007, for instance, it suffered an annual average of 390 strike days per 1,000 workers, while the corresponding figure in America was near zero.
Even worse, almost all Israeli strikes are in the public sector, where they do maximum harm to the rest of the economy. If a private company strikes, it usually affects very few other businesses. But if dockworkers or customs officers strike, it affects every importer and exporter in the country.
Moreover, their ability to do so much damage by striking has enabled public-sector workers to extort exorbitant wages and benefits, paid for by the taxpayer. That’s why electric company workers and dockworkers, for instance, earn three times the average wage. That’s why railway workers are promised NIS 100 million in “compensation” for reforms even if the reforms don’t take place. Or why port pilots are paid up to NIS 77,000 per month to sit at home and do absolutely nothing: Even after an arbitrator ruled this unacceptable, the ports company continued the payments in order to end labor sanctions that were causing even greater damage. And so forth.
In short, passing this legislation is vital even if it costs money – which it would, since it would certainly spark a public-sector strike that would require massive payoffs to settle. Instead, Lapid capitulated to the Histadrut.
But while Lapid’s fiscal irresponsibility and lack of backbone are his own fault, the blame ultimately rests with Netanyahu. This isn’t only because, as prime minister, he could overrule Lapid’s bad decisions. Primarily, it’s because he’s the one who saddled Israel with an unqualified finance minister to begin with.
That Lapid had no knowledge of or interest in economics was no secret. But after his popularity soared so high during the coalition negotiations that he appeared to pose a real threat to Netanyahu in the next election, Netanyahu was determined to undermine his rival at any price – even that of harming the country. Thus rather than give Lapid a job where he might do well, such as the Foreign Ministry (where his fluent English, personable character and rhetorical skills would all be pluses), Netanyahu maneuvered him into a job for which he was clearly unfit by insisting that the only senior portfolio he was willing to give a coalition partner was finance. And as head of Netanyahu’s largest coalition partner, Lapid couldn’t politically afford to settle for anything less than a senior portfolio.
Netanyahu’s stratagem seems to have succeeded: Lapid has been dissipating political capital rapidly in his new post. Unfortunately, the entire country is paying the price for the prime minister’s political victory.The writer is a journalist and commentator.