The Treasury and Bank of Israel are undermining Israel’s business sector

We have witnessed a flood of legislative and regulatory initiatives such as our country (or the world, for that matter) has never seen before.

Latet's 'Unattainable Meal' exhibit in Rabin Square in Tel Aviv (photo credit: SHLOMI MIZRAHI)
Latet's 'Unattainable Meal' exhibit in Rabin Square in Tel Aviv
(photo credit: SHLOMI MIZRAHI)
During the past decade, the Israeli economy has shown a capability for strong growth, combined with impressive stability.
The business product doubled between the years 2005-2015, growing by 107 percent from $107 billion to $222b. During this decade, from 2004 to 2007 growth reached almost 7%.
Israel survived the world crisis of 2008 better than most countries: there was no negative growth, and by 2010, the growth rate was back to 6.6%. The economy maintained its stability, and the ratio of national debt to product was reduced.
These achievements attracted notice the world over. The shekel came to be considered one of the strongest currencies, and the Israel economy one of the world’s strongest. However, it seems that we Israelis have some quality that prevents us from holding on to success for long. A purblind administrative system has been operating continually to wear away these achievements. During the above-mentioned period of growth, there has been a trend established in Israel, in which the government, the Knesset and a host of regulatory bodies have demonstrated an insatiable appetite for solving problems by increasing the burden on the business sector.
We have witnessed a flood of legislative and regulatory initiatives such as our country (or the world, for that matter) has never seen before.
The basic rights of employers have been whittled away. Proprietary rights have been infringed. Freedom of contract has been restricted. The right of free speech has been severely restricted – and attempts were even made to prevent employers from adjusting the structure of their employment to the changing market conditions.
At the same time, there was a high tide of criminalization of business management. There was a surge in the creation of new crimes. In labor law, there are no less than 200 criminal offenses. In environmental protection there are 785, in the laws for protection of the consumer there are 62, and in the capital market the number is too great to be readily counted. Employers in Israel today are in greater danger of criminal indictment than are the members of the criminal underworld.
In labor legislation, the tendency to increased severity took on the nature of a flood. No less than 190 legislative alterations – both laws and regulations – in all of which additional obligations are laid upon employers, and in not one of which are defined either the obligations of an employee or the rights of an employer.
The desire to protect the environment is universal and laudable. To that end, five main legislative acts were passed, all of which place the main onus on employers, and not on the municipal authorities. Anyone importing medicines into Israel is seen as a contaminator of the environment, since the medicines arrive packaged. An importer of vehicle tires – which in actual fact, are designed to improve driver safety – is likewise seen as a polluter.
Consumers have been the beneficiaries of additional layers of protection: six legislative acts, all intended to protect the consumer from the business sector – despite the fact that we already have a Law of Sales and a Law of Contracts. Consumer protection has reached a point at which the consumer has no responsibility at all, and is no longer required to exercise discretion or judgment. A consumer is today able, within the bounds of the law, to return any product, or service – even one which he has chosen of his own free will, and in which there is no flaw or misrepresentation whatsoever.
We may have thought that the decisions of the government have reduced regulation; in fact, the opposite has occurred. Instead of offering cooperation, they set up new regulatory bodies.
For example the Law and Technology Authority, or the Consumer Protection Authority. The government’s decision to reduce regulation by means of RIA did not produce results.
The carrying out of the government’s decision “to reduce regulation by 5% per annum” is not backed up by any kind of supervision or monitoring of results.
It is the business sector itself which has become the de facto executive arm for the regulatory authorities. This has come about through an ingenious system of new requirements for online reporting.
The improvement of employees’ pension conditions is a universally desirable subject. But this subject, too, has suffered as a result of excessive regulatory zeal. Amendments have been piled on – such as amendments 12 and 16 to the Provident Funds Act, regarding increased deductions for pensions, payment by employers to insurance agents who are both operators and marketers, and so on.
The end result of the above is a substantial increase in employers’ costs, with no corresponding cost reductions and no increase in efficiency, in any of the absolute monopolies controlled by the government – electricity costs, seaport services, airport services, water costs, etc. The tax burden has also increased. Corporate tax has been raised from 25% to 26.5% and lowered back after three years to 25%, and the tax on withdrawal of profits raised from 25% to 30% – an increment of 20%.
The labor courts, and the National Labor Court, have gleefully fallen in with this trend. Even the Supreme Court has gone along, by restricting employers’ freedom of expression – a basic freedom enjoyed in Israel even by the enemies of the state.
Whenever the possibility of protecting the country’s business sector, however slightly, is brought up, an automatic negative response is certain to occur. When the Treasury decided to reduce corporate tax rates, headlines immediately screamed “benefits for the wealthy!” And when the Justice Minister expressed the view that balance should be imposed on class actions, her words met with extremely strong criticism.
The cumulative results of this burdensome trend have not been slow to appear.
In 2012, growth in the business sector fell to a rate of 2.6%. This was followed by a slight improvement in 2013. In the years 2014-2015, the business sector in Israel has been in a state of essentially zero growth: 2.3%, which is simply the growth corresponding to the country’s population increase. Likewise, during the first half of 2016, the rate of growth has remained at the null level of 2.3%.
I am left wondering whether those responsible for setting Israel’s economic policy understand that there is a limit to the burdens which can be imposed on the country’s business sector. Do they not realize that the continual imposition of additional requirements and restrictions on business promoters and entrepreneurs does immense damage to the motivation to build and develop new enterprises? Are they really not capable of understanding that growth of the economy stems from activity of the business sector, and not from growth of the public sector? How is it at all possible to establish a financial policy of growth when not a single responsible body in the government has even begun to understand the significance of all the extra costs and expenses with which the business sector has been burdened over the past 10 years? Or of the additional time and manpower required to cope with that load? I am particularly taken aback by the Bank of Israel, which should be the government’s financial adviser.
Despite being equipped with a research department which is plentifully manned and rich in resources, the bank continues to ignore all the necessary lessons. It carries on with its limited calculations, cut off from reality, as though nothing at all had happened in the nation’s business sector outside the financial system; as though conditions of business development, and business management, were exactly the same today as they were 10 years ago.
The regrettable conclusion is that both the Treasury and the Bank of Israel are totally unaware of (or worse, choose deliberately to ignore) what is happening today in Israel’s business sector. The Treasury concentrates on achieving goals, some of which are important to Israel society, but has failed to formulate an overall policy, stating what must really be done to bring the country’s business sector back into conditions of real growth.
The Bank of Israel continues to call for additional increases in the country’s tax burden, instead of working to find ways of increasing growth and expanding the economy. Everywhere one hears talk of impressive growth engines, research and development, high-tech, cyber, etc. All these are without doubt of great importance, but real growth is not to be achieved through selective encouragement of a few limited, elitist sectors. Growth is achieved when policies are adopted which embrace the entire business sector: agriculture, manufacturing, construction, trade and services alike.
Managing a national economy calls for more than simply an ability to surmount crises. It calls, first of all, for an ability to identify processes within the economy which lead to crises, and to deal with them before crisis supervenes. Today, this ability is not to be found among Israel’s decision makers: not in the government, not in the Knesset, not in the regulators and not in the Bank of Israel. We continue, slowly but surely, to undermine the business sector, in the mistaken belief that all is well, and that things can go on as they are – with no conception of the inevitable consequences which will ensue, in the not-too-distant future.
The author is president of the Federation of Israeli Chambers of Commerce.