The successful decade (Hamodia, October 8)

The previous column explained how the 2015 budget, which has finally been cobbled together by Prime Minister Netanyahu, Finance Minister Lapid and Defence Minister Ya’alon, represents a messy compromise between their conflicting positions and competing wishes.

The cost of keeping all these gentlemen happy is that government spending will rise sharply, yet taxes will not be raised — at least not the main taxes, although lots of ‘stealth taxes’, such as fees, levies and other government charges will increase. Consequently, the size of the deficit will grow significantly, both in absolute terms and as a percentage of GDP.

It is therefore a near-certainty that fiscal policy — the areas of taxation and government expenditure — will be very strained next year and that additional measures will have to be taken. Expect to hear about spending cuts — with Haredi/ welfare programs prominent targets — as well as tax hikes, which will be unavoidable.

The budget strains will lead to constant argument over how to fix the flaws that are being built into the 2015 budget. So it’s a safe bet that the media will frequently trumpet political ‘crises’ stemming from these arguments. The impression that will be created — indeed, that is already spreading — is that Israel has severe and deep-seated budget problems.

In fact, the opposite is the case. That’s what I meant when I noted last time that although Israel’s budget situation today and for the foreseeable future is the worst it’s been in a decade, that is good news and bad news at the same time. It’s bad for obvious reasons — in the end (next year or, at the latest, after the next election) there will be no choice but to adopt serious measures: real cuts in spending, increases in tax rates and the elimination of cherished tax breaks.

But it’s good news in the sense that for the last ten years virtually no other developed economy has been as successful in its fiscal policy as Israel has. As a result of the achievements chalked up in the last decade, Israel is now able to weather a tough period. That’s not an excuse for making poor policy decisions, but it provides a cushion to absorb their impact.

The most important measure of success (or otherwise) in fiscal policy is the ratio of a country’s sovereign debt to the size of its economy — debt/ GDP, in short. Debt stems from deficits, so if deficits are large and/or rising, debt accumulates quickly and the debt/ GDP ratio rises. In 2003, Israel’s ratio was around 100% — considered very high. At that time, most of the countries in North America and Western Europe boasted ratios of around 60-70% and some were even lower.

But from 2004, Israel’s economy moved into high gear. Strong growth and surging tax receipts pushed the deficit to zero in 2007. The global crisis in 2009 caused a brief downturn, but Israel bounced back very strongly and continued its pre-crisis surge until 2011. In recent years, growth has slowed but the budget deficit has also been declining — so that the debt/GDP ratio slumped to about 66% at the end of last year.

Meanwhile, the crisis hammered the developed economies and their governments have been running very high deficits. Consequently, the US and most European countries (Germany is a major exception) have seen their debt/GDP ratios zoom to levels of 90-100% or even higher.

These are not abstract calculations. Strong growth has enabled the Israeli budget to expand every year, meaning that spending on every sector — health, education, welfare, as well of course as defence — has increased in absolute terms. That’s a sharp contrast to Europe, where most countries have implemented austerity policies in which absolute spending has been reduced, sometimes significantly.

So far, the ‘cuts’ in Israeli government spending made in 2014 and planned for 2015 have come from not increasing spending — in other words, although the overall cake is bigger, the size of some slices has remained the same.  We haven’t seen real cuts for over ten years, and hopefully we won’t next year either — but don’t count on it.

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