The budget - wrong process, right result

PM was right to sacrifice conservative fiscal dogma, but wrong in the way he went about it.

By JERUSALEM POST STAFF
Published: MAY 13, 2009 19:44
Netanyahu under pressure 248.88 (photo credit: Ariel Jerozolimski)
Netanyahu under pressure 248.88
(photo credit: Ariel Jerozolimski)
After a marathon cabinet meeting, the 2009-2010 budget package was finally approved yesterday. The appearance of pandemonium is a feature of Israel's budget season. This time around, the hullabaloo was exacerbated by an open rift between the political echelon and Finance Ministry professionals incensed that the government had mollified the Histadrut Labor Federation by sacrificing fiscal conservative doctrine - in other words, tight control on spending. Indeed, Budget Director Ram Belinkov resigned in protest. At the end of the day, the cabinet scrapped most of the proposed budget slashes, plans to reduce tax exemptions and outlandish fee levies. Gone are the draconian measures that threatened to deepen the hardship of lower-income groups. Neither welfare nor health, nor education, will be singled out for painful decrees, the claims of the local authorities notwithstanding. Hospitalized patients will not have to contribute a NIS 50 daily co-payment. And while public sector employees won't be denied wage hikes already in the pipeline, they will temporarily cede perks such as clothing allowances and R&R stipends. Even the defense budget - not all of which contributes directly to our security - was largely spared. There are ways to save money in defense; but that will have to wait for another time. SO HOW will the government fund its increasingly costly operations since tax revenues are down due to the recession? If it cannot substantially cut costs, it must allow for a larger than planned deficit. It couldn't have expected to limit its spending increase to just 1.7 percent - that will nearly double. This is tantamount to printing money and inviting inflation down the road. Yet most countries have had to inject money into their cash-starved economies. It's a worldwide dilemma. The government will also cut costs by imposing a 6% cut on all (but defense) spending including police, education and health. Other shortfalls will be defrayed via a 1% hike in VAT. We don't think this regressive measure, which directly impacts consumers and may reduce consumption, is what's called for in this recessionary period. And we're certainly not keen on extending VAT to fruits and vegetables - though that's not yet been decided. Other sources of revenue will come from postponing tax cuts, raising National Insurance Institute ceilings for high earners, and increasing taxes on luxury items. That may please populists, but it won't necessarily enrich the public coffers. Something Monday-morning quarterbacks should keep in mind is that there are no magic wands. The bizarre assortment of Finance Ministry-proposed budget cuts was easy to lambast; now, it's equally easy to castigate the government for "cravenly" caving in to Histadrut pressure. There is no question that our budget process appears farcical. The pendulum seems to swing from one extreme to the other, leaving all of us bewildered. But blame it on the political system, which needs reforming. The head of a crazy-quilt government coalition cannot dismiss the patronage interests of his ministers. Moreover, at each budget season, red herrings - proposals never meant seriously - are introduced. The same occurred now. Hence, though any compromise can be depicted as capitulation, there was really less "surrender" on the government's part than meets the eye. THE government purchased industrial peace by placating the Histadrut. Nothing can undermine economic recovery more than destabilization, and nobody can destabilize even the most cleverly managed economy more than the labor federation. Indeed, never in this country's history have significant economic cures been effected sans accommodation with the unions. Most noteworthy: the 1985 dramatic recovery from mega-inflation. Finding a modus vivendi with the Histadrut is indispensable because when the labor federation calls for nationwide strikes, these can cause more damage to the economy than, for example, the extra spending and higher budget deficit mandated by yesterday's package-deal. The 2009-2010 budget package was a commonsense compromise - good news for the economy. But the way Prime Minister Binyamin Netanyahu managed the process, along with the way the concessions were unveiled, gave an impression of vacillation and loss of control. The PM was right to sacrifice conservative fiscal dogma during this time of worldwide volatility, but wrong in the way he went about it.