Analysis: Three sections of the state budget and Arrangements Bill—approved recently by the government—are of specific interest this year, as they indicate that the Israeli economy, while still strong, is weakening.
Three sections of the state budget and Arrangements Bill have been approved by the government (with no “nay” votes or abstentions): the expenses section, the income section, and the “reforms” section.
The expenses section, which is expected to become law after Knesset approval, includes a mix of cuts and additions. The most significant cut comes under the subsection called “prioritization of government ministry expenses ahead of budgetary discussions for the years 2017-2018, and meeting the totality of government obligations for 2016.” Crystal clear, no?
But don’t give up yet. The basic essence of this section is simple: A 2% cut in the state budget this year, and another 2% next year. Keep in mind, dear ministers, the fact that you agreed in practice to cut NIS 2 billion from the entire 2016 budget. That means you’ll have to cut about 4%-5% of what you have left, since some of the budget was already used earlier in the year. And after this is done, you’ll have to go right back and do it again. After all, you agreed to cut another 2% next year off the already-cut budget of this year.
However, these longitudinal cuts are entirely unnecessary. Their cost is much higher than their benefit. The Finance Ministry claims the cuts are necessary to prevent the budget deficit from growing, but from a macroeconomic viewpoint there’s basically no difference between a deficit that’s 2.9% of GDP and one that’s 3.1% of GDP. This is a small number decrease that will cause great social suffering.
In order to squeeze out the ministers’ agreement to the longitudinal budget cuts, they were promised a number of unique additions. Most (but not all) of these are aimed at worthy social causes. The biggest winner here is Minister of Health Yakov Litzman: He gets to kill the lame idea of taxing advanced health plans, as well as receiving long-term sums to support the expansion of the state-subsidized medicine list, the shortening of waiting times, and the overall functioning of the public health system.
The biggest loser here is Minister of Education Naftali Bennett: The extended school-day idea is once again being pushed off into the possible future, ultra-Orthodox education institutions won’t have to teach core subjects in order to receive state funding, and Israeli universities will continue to operate on borrowed time. In contrast to the prime minister and education minister’s statements, this two-year budget features a grave lack of economic growth engines, especially when it comes to public investments. These are lower than their international equivalents, both as far as government goals and practical actions are concerned.
This budget was cooked in a dense political kitchen, filled with large clouds of accountant smoke. That’s why we’ll only know the bottom line of each ministry’s budget, and the particulars of each individual project’s status—whose budget was reduced and whose was increased.
And still, it should be said that the expenses section does an excellent job as far as transparency, economic logic, and social attitude are concerned, compared to the incomes section, which seems like an improvised patchwork. The Finance Ministry outdid itself with the incomes section, and not in a good way.
The special tax levied on third apartments and over, given the intentionally-confusing name of “multiple asset tax” (“mas nechasim merubim” in Hebrew. -ed), has been slightly modified, but remains distorted. In the past, Finance Ministry higher-ups would fiercely fight the idea of taxing apartments—and apartments alone, no other asset such as lands, office space, or financial investments—according to their number rather than their value. This year, they bent their professional heads down in the face of popular will.
The same goes for the strange decision to reduce taxes on people with low and middle-range incomes, since Israel already taxes them at a rate that is one of the lowest in the West, if not the very lowest. The idea of forcing private companies to hand out dividends to shareholders—even if they don’t want to—just so the state could tax said dividends (and, by the way, the fate of this idea is not yet known) seems like it was copied from some dictatorship’s law book. Changing the way kibbutzim are taxed, if approved by the Knesset, will probably lead to a challenge in the courts—one that the state will likely lose.
And then there are proposals that are just shy of outright absurdity, such as collecting all municipal rates payments from government offices into a national fund, and distributing the collected money according to the needs of different municipalities, not the physical location of state structures. This idea flies in the face of the fact that municipal rates are distinctly locality-based taxes; there’s no justification for turning it into a nationally-based funding scheme. You want to improve the state of smaller, isolated towns? Bring government facilities over there, just as the IDF is doing with its new large-scale training base in the Negev. But that’s hard to do, while playing around with municipal rates is easy.
And what of the many “reforms” that come in two different packages this year—the Arrangements Bill and the budget proposal? The proposed changes to the communications field were included in the Arrangements Bill, but the changes in the relationships between health service companies and hospitals were included in the budget proposal, perhaps so that the Arrangements Bill won’t seem too bloated.
Most proposed changes in both packages are reasonable and necessary, but their place is not in discussions about government budgets or in the Finance Ministry’s office meetings, but in initiatives taken by different government ministries. The Ministry of the interior, for example, should have initiated the (miniscule) reduction in balancing giveaways to local Jewish municipalities in the territories, the Economy Ministry should have taken on the reduction in the market’s emergency supply stores, and the Communications Ministry should have made the changes in its field on its own. The question arises: Why do you even need ministries and ministers in the state of Israel if the Finance Ministry and the person at its head eventually rule over all?
And in general, all of the “reforms” detailed in the budget will place more burdensome regulations on the shoulders of the Israeli market. It’s quite well known that when the government of Israel says “adding efficiency” what it means is “adding regulations.” Because according to our government, efficiency means adding regulations, instructions, legislation, and clerks. The number of regulatory employees has grown by 300% in the past decade.
And in contrast to the fogginess of the actual budget, we can praise the section of macro-economic predictions by the Finance Ministry’s head economist. It’s a professionally written, deep-delving chapter that doesn’t shy away from assessing the various risks facing the Israeli markets and their possible effects on the budget. I heartily recommend that people read it, if for no other reason than so that they may witness the fact that the 2017-2018 budget reflects a still-strong Israeli economy, but also one that is weakening.
As reported by Ynetnews