In Thatcher’s spirit

Lapid and Bayit Yehudi leader Naftali Bennett, share the late Thatcher’s appreciation for balanced budgets and small government.

Lapid at Knesset 370 (photo credit: Uriel Sinai/Reuters)
Lapid at Knesset 370
(photo credit: Uriel Sinai/Reuters)
Margaret Thatcher’s death this week, and the lively debate it touched off concerning her economic legacy, provided the perfect backdrop for the fiscal drama in which former newscaster and screenwriter Yair Lapid now finds himself starring.
While economically imperative, the expected package of taxes and cutbacks has thrust the new finance minister into the social, strategic and political fray so abruptly that one thing can already be said about his situation with certainty: The Lapid who will emerge from this crucible will not be the Lapid who entered it.
The need for the cuts is glaring. A NIS 40 billion budget deficit, equal to 4.2-percent-of-GDP, demands immediate treatment. That is what most economists think, and that is also what most citizens thought when they voted for Prime Minister Binyamin Netanyahu, Lapid and Bayit Yehudi leader Naftali Bennett, who share the late Thatcher’s appreciation for balanced budgets and small government, as does the current coalition’s forgotten member, Tzipi Livni.
As of this writing, the specifics of the plan have yet to be formally announced, but the general expectation is that roughly a quarter of the package will eye increased revenues through increased and new taxation, and three-quarters will comprise spending cuts.
Lapid’s ax will reach every ministry, but no matter how one twists this Rubik’s Cube, the Defense Ministry will part with more funds than any other agency. With a NIS 60b. budget, Israel’s defense spending is 16% of the national budget and 6% of GDP – the highest per-capita share in the developed world. The Treasury is reportedly seeking an NIS 4.5b. cut in defense spending.
After defense will come infrastructure projects, with plans like the Jezreel Valley railway, the tunneled road from western Jerusalem to Motza, and the electrification of the railway system all standing to be delayed, slowed or suspended. Besides such specific projects, public sector salaries are expected to be frozen and possibly cut.
Spending for ultra-Orthodox causes, most notably transfers to yeshivas, is expected to reach NIS 1.5b. Child allotments, which were cut sharply in 2003 and later that decade partially restored, will once again be cut, affecting mainly low income haredi and Arab families. The cut in this clause may reach NIS 4b.
On the revenue side, a series of taxes stand to be raised, affecting every Israeli.
Income taxes will reportedly climb by a flat 1%, meaning that, for instance, salaries of NIS 9,000 to NIS 14,000 will be taxed 15% instead of 14%; salaries of NIS 15,000 to NIS 20,000 will be taxed 24% instead of 23%; and salaries of NIS 21,000 to NIS 40,000 will be taxed 31% instead of 30%. Corporate taxes, currently roughly 25%, will also be raised by 1%, and the 5% health-services tax will be adjusted to 5.5%.
Perhaps most tangibly, value-added tax is expected to rise from 17% to 18%. Talk of imposing VAT on fruits and vegetables has come and gone over the past two weeks, but if this measure materializes after all, it will mean an overnight 18% appreciation in the price of any tomato, cucumber or apple we buy.
At the other end of the social spectrum, Lapid intends to hike sales taxes on luxury good, from cars to houses and apartments.
And most painfully, Lapid was reportedly considering taxing medium-range savings, known as “training funds,” into which wage earners and their employees deposit monthly deductions which can be withdrawn in five-year intervals.
TAKEN TOGETHER, these proposed measures affect all social layers, from a tycoon’s income tax and corporate taxes to a street sweeper’s grocery bag, and from a middle class household’s savings to a working class household’s child allotments.
Lapid was careful to avoid appearing excessively harsh on any walk of Israeli society.
The proverbial Ms. Ricki Cohen, the middle class mother of three whom Lapid portrayed as a teacher married to “a hi-tech employee” with a combined monthly income of NIS 20,000 and a vacation abroad every two years – will no doubt feel pinched. However, Lapid will tell her and her husband that had he allowed the deficit to fester, the financial markets would have run on the shekel, quickly resulting in higher interest rates, which in turn would have made Mr. and Mrs. Cohen’s mortgage swell more exorbitantly than Lapid’s taxes.
Netanyahu’s cutbacks as finance minister in 2003 hurt the underprivileged more than the rest.
Lapid’s will leave everyone equally disgruntled.
Consequently, everyone will soon be asking what Lapid so convincingly asked during his election campaign: “Where’s the money?” by which they will mean: How did the deficit we now have to offset grow so big in the first place? Fortunately for Lapid, this part of the conversation will not involve him, as he was not there when the government overspent the way it did. However, he would benefit from learning how it happened lest it happen to him, too. And rather than drown in numbers, as he said he now does daily, the essentials he should know about the deficit’s birth are these.
First, as the Bank of Israel’s previous annual report stated, defense spending in 2011 exceeded by 2.5% its prescribed target. Secondly, according to the central bank’s subsequent report, the universities’ and the HMOs’ combined deficits last year equaled 0.4% of GDP, after having been continuously in the red since 2008. Thirdly, last year’s tax returns fell NIS 18.5b. short of the Treasury’s forecasts, reflecting a slowdown in exports due to the global crisis. Finally, despite its shrinking resources, the government spent NIS 2.2b.
more than its own original plan.
The unbudgeted spending went mainly to plans related to the Iranian threat, the southern border fence, and the expansion of free education to age three, following 2011’s social protest. It would have been fine to make all these expenditures had they been offset by cutbacks elsewhere.
The failure to finance unplanned spending is then the root of what Lapid now faces, as is Netanyahu’s inaction in the face of fiscal shots from the hip that he would not have allowed back when he was finance minister.
Politically, the cutbacks mean Lapid will have to routinely face ministerial funding demands for truly important, but unaffordable causes. The way he confronts them will decide the success or failure of his second career.
THE OPPOSITION that awaits Lapid made itself heard even before he unveiled his plan.
First to speak was Transportation Minister Israel Katz, who has been working hard for the past four years to complete big projects, from the Jerusalem-Tel Aviv high-speed train to the Haifa-Eilat railway.
Katz could therefore be understood for decrying proposed cuts in “his” projects, which he said are ultimately growth engines.
Interior Minister Gideon Sa’ar responded similarly, when he said he will oppose proposed cuts in transfers to municipalities, as did Internal Security Minister Yitzhak Aharonovitch, who said he would do “whatever possible” to block prospective cuts in police budgets.
Such ministerial protestations and lamentations are part of a time-honored Israeli ritual that is performed whenever public budgets are cut, and deflecting them is part of an Israeli treasurer’s job description. They seldom prove to be serious obstacles, and most complaining ministers are expected to be silenced by Netanyahu.
Lapid will be tested according to his handling of the social outcry that will surely erupt once the details of his plan are unveiled.
Led by Labor and Shas, the cutbacks’ attackers will portray them as focusing on the poor.
Lapid will respond that everyone is affected by the cutbacks. In doing that, he will likely deploy his party colleagues, Deputy Finance Minister Mickey Levy and Welfare and Social Services Minister Meir Cohen, both self-made children of Middle Eastern immigrants who were born and raised a light-year away from Lapid’s upper middle class upbringing.
Lastly, the budget showdown will potentially pit Lapid against Defense Minister Moshe Ya’alon. The latter has already been in politics for years, and on the face of it arrives at this fight more experienced than his rival. His response to the proposed budget is his first real high-stakes political test.
Ya’alon’s instinct will be to oppose any cuts to “his” ministry, like all other ministers and even more so, like the many other retired generals who as defense ministers, represented the military among the civilians, instead of bringing the civilians’ message to the military.
Ya’alon may, however, want to show that he is driven by concerns larger than the military’s narrow perspective. If he chooses to in the cabinet say something like, “I am supposed to oppose this plan, as I am the one who will foot its largest bill, but even so I back it because this is the national interest and I urge the rest of us to do as I do,” his stature will transform overnight from that of a retired general to a national leader.
Chances of this happening are, of course, limited. Then again, until three months ago chances that Lapid would be finance minister were even lower. Now he is at the fiscal helm, and with or without his main passengers’ enthusiasm, the clapperboard is about to snap as Lapid’s journey into uncharted waters begins – with the entire Jewish state on board.