More reform, more scrutiny

No tax increases, no welfare cuts, and increased defense spending simply won't add up.

hirchson podium 88 298 (photo credit: Ariel Jerozolimski)
hirchson podium 88 298
(photo credit: Ariel Jerozolimski)
In his presentation introducing the 2007 budget yesterday, Finance Minister Avraham Hirchson struck a number of sensible notes. At a time like this, however, when our economy needs brisk growth more than ever, we wish he could do more than ward off the many bad ideas being proposed and accelerate pro-growth economic reforms. Hirchson announced that the budget framework would not be broken, aside from a one-time NIS 3.5 billion addition to replenish IDF stocks and help rebuild the damaged North. He rejected calls, including, unfortunately, from the Bank of Israel, to raise VAT taxes to pay for the war. Instead, he allowed the deficit to increase from the pre-war plan of 2.0 percent to 2.9 percent of the budget. Despite widespread complaints that it was slashing social spending, the Treasury claims that welfare spending will rise by NIS 2 billion, the health basket by NIS 237 million and the education budget by NIS 100 million, all compared to the 2006 budget. Yet the budget does remove inflation adjustments for child allowances and puts off the planned increase in the minimum wage. The minimum wage increase was a bad idea to begin with, as it risks increasing unemployment if it ever is allowed to take effect. The trimming of child allowances, however, is the economic equivalent of a tax increase, and a regressive one at that. According to Hirchson, the problem is that many people are making impossible demands on a finite pie: keeping spending in line, no tax increases, no welfare cuts and increased defense spending. He says this simply won't add up. There are two ways, however, in which a seemingly finite pie can be stretched to better serve the economy and society: by cutting waste and by promoting economic growth. Hirchson is right that it would be a terrible mistake to repeat the errors of the past and return to the deep and long recession that ended just a short time ago. But where did the revenue surplus that was used to pay for much of the war's costs come from? He should be the first to say it came from the growth produced by fiscal restraint and tax cuts, along with long-awaited cuts in interest rates. Accordingly, what we need now is more of the policies that succeeded, not just an avoidance of failed approaches. This means continuing with tax cuts, tax reform, privatization and deregulation. It also means embarking on swaths of reform that have not been attempted, such as reducing the number of government ministries, and demanding that ministries present plans to reduce waste and abuse, not just for increased budgets. Year after year, successive governments have imposed necessary fiscal restraint in the most damaging way: across the board cuts that fail to distinguish sufficiently between the truly needy and those who abuse the system, between good programs and bad and between the services delivered to citizens and the many-layered bureaucracy that has accumulated to deliver them. In this vein, Hirchson's call to make the civilian portion of the defense budget as transparent and accountable as the rest of the budget is welcome and long overdue. If there is a budgetary lesson of this war, it is that both the size and composition of defense spending must be more closely scrutinized and substantial changes made. We should note that in the midst of World War II, a relatively unknown US senator named Harry Truman used his congressional perch to ruthlessly root out waste in the American defense department. His determination and political audacity led Franklin Roosevelt to choose Truman as his running mate, and he went on to become one of America's most successful presidents. We need similar members of Knesset and ministers who will devote their zeal not just to agitating for larger budgets, but to eliminating waste, fraud and abuse. As Truman demonstrated, even - perhaps especially - the defense budget should not be exempt from such a critical eye. The more important a budget is, the more important that it be spent efficiently and correctly.