Budget-2013
Welcome y’all to Israel’s goat-hunting season. This celebration of the verbal blunderbuss is one of those really strange events that only Israelis could have invented.
The name was taken from an old Yiddish folk tale about a poor fellow in a shtetl who has a dozen children, lives in a one-room house, and is going out of his mind because of the noise. To make a very long shaggy goat story very short, the man goes to his rabbi to seek advice on what he should do before he loses his sanity. The rabbi tells him to bring a goat into the house. Two weeks later, the man returns to the rabbi and complains that his household is now far worse…a total wreck. The rabbi nods in understanding and tells the man to take the goat out of the house. The man is skeptical, but does as he is told. The next day he returns to the rabbi, a big smile on his face. “Why are you so happy?” the rabbi asks.
“Ah…the house is so quiet,” the man replies.
With that story in mind, I dedicate this piece to goats everywhere.
When an Israeli budget is introduced, the tax and spending proposal is invariably full of weird proposals…and with good reason. Those proposals are goats I am talking about.
In most democratic countries, budget time is a period of deep introspection, a time to assess which government policies have worked, and which haven’t—and why. Then come the crucial questions: What haven’t we done that needs doing? Do those things that we have done that have worked well deserve more money—or maybe because they have been so successful, they now need less money? And if that money is now available, what should be the priorities in deciding how to spend it.
In other words, budget time shouldn’t be a time only of financial accounting, it should be the moment when all the foreign and domestic challenges a country faces are given due, thorough analysis. It’s should also a time when, as in Lent, politicians give up their favorite little sins like populism for a simpler diet of honest introspection.
In Israel, though, that process is as rare as the sale of bacon in the Knesset dining room. Instead, the Knesset members usually spend most of their time making sure that their pet projects, wasteful as they may be, have been fully funded. Then they go out on their goat hunts, with the news cameras obediently in tow to celebrate how they have embarked on a campaign to save the whole nation from perdition.
As might be expected, the finance ministry attentively monitors each of these moves.
The reason is that the finance ministry needs to assure itself that the Knesset members will then busy themselves with publicizing their successes on the goat hunt to such an extent that they will ignore more important budget taxation and spending proposals.
A good example of the goats I am talking about can be found in the current draft budget. The budget proposes, for example, that if an apartment-owner sells his or her apartment in order to buy a larger one, he or he should pay a 3.5 percent tax on the differential in the price between the two flats. That proposal seems to me to be a more effective form of birth control for married couples that anything that Planned Parenthood could come up with.
Another goat in the budget would have unemployed housewives pay Health Tax for the first time.
But hunting goats is just one of the amazing things necessary to get a budget passed in this country.
So, what I would like to do tonight is to take you on a guided tour of what is Israel’s version of economic wonderland. Alice and the Mad Hatter would have been totally at home in Jerusalem or Tel Aviv at this time of year.
But first, as in all great tragi-comedies, I need to give you a bit of context and set the stage.
All the economists in Israel have been saying or months that because of the record-breaking deficit, the new budget will have to include record-breaking tax increases and record-breaking cuts in spending.
From their remarks, you would think that Israel had not faced economic crises before—and hadn’t learned important lessons from those disasters that are already being applied today.
Nonetheless, despite those lessons serial economic crises remain endemic to this country. Just to give you a short reminder:…Among other economic crises, in 1965, the government initiated a disastrous recession that only ended with the 6 Day War. In 1982, the banks played footsie with their share prices and wiped out most peoples’ savings. In 1984, the government’s budget was greater that the country’s GDP and that had led to hyper-inflation. 1996 saw the collapse of the Histadrut pension funds. And 2003 was the time of the internet bubble collapse and the second intifada.
So, the fact that this year the new government is facing a large budget deficit is neither novel nor particularly special.
Another thing that is not new is the way that the government is trying to extricate the country from the mess it is in. As has occurred too often before, most of the rises in taxation and cuts in services will hit the working classes disproportionately.
One thing that is new this time, though, is that most of the rest of the world is also going through a period of economic instability. So, this has given the pundits and some of the politicians a sop because they can now compare Israel’s situation with that of Spain or Greece…or even the US.
That attempt at comparison is, of course, absurd. The situations in which the parties find themselves are totally different. Among many other differences, the Europeans and the Americans are trying to resolve their problems by introducing greater transparency into their financial markets and into their economic planning. Israel, on the other hand, continues to use opacity in economic planning–and at times to even raise the act of opacity formation into an art form.
For example, over the past few years, one of the finance ministry’s favourite gambits has been to hide potentially contentious and controversial budget proposals in a mass of utterly blinding transparency. The technique is brilliantly simple. Basically, the treasury is saying: You want transparency, I’ll give you transparency.” And so the whole civilian budget is now published as a single document. That means that anyone really wanting to make sense of the document has to make his or her way through 110,000 line items.
It is the rare person who reads more than the carefully-edited executive summary…and any specific provisions he or she may be interested in.
So, let me now walk you through the Israeli budget process, and explain how, among other things, it was created. Up until the victory of the Likud in 1976, tracking budget planning was relatively easy. The government was run by socialists, and so only the socialists’ friends—the tycoons, the bankers, the settlers living along the country’ borders and the Histadrut—were able to extract special favours from the government. Ordinary folks had to cope with poor services, bureaucratic arrogance, high prices and high taxes to pay for that largesse.
Now, though, the government is in the hands of capitalist free marketers, so that only tycoons, bankers, settlers and the Histadrut can extract special favours from the government. And only ordinary folks have to cope with poor services, bureaucratic arrogance, high prices and high taxes to pay for that largesse.
For those who love horse races, you will see that there have been more economic crises during Likud-led governments than during Labour-led ones. That is because the Likud never had an economic ideology, and never really pretended to have one. That made it different from Labour, which once did pretend to have an ideology, but, at least since the 1970s, hasn’t even claimed to have one. And so the real reason that there have been more Likud-induced economic crises since 1965 is that there have simply been more Likud-led governments than Labour-led governments.
The current format for preparing and passing the budget was essentially developed in 1984, during the height of hyper-inflation. Basically, the government was henceforth prohibited from borrowing money from the Bank of Israel. It was only permitted to borrow money on open markets, where it would be punished with high interest rates if it did foolish things like running up huge budgetary deficits that foreign investors thought would be hard to pay off. In other words, since the Israeli public had been unable to discipline the politicians, the politicians themselves, under intense American pressure, decided that it was simply safer to let the goyim mark the country’s economic exam and publish the report card.
At the same time, the workers in the finance ministry were given a firm mandate to prevent such deficits from occurring. This then set up a situation in which the politicians kept complaining bitterly that the civil servants were doing as they had been told.
In order to allow the civil servants to do their job effectively, Israel also invented something no one else had—what is now called the “arrangements law.” That law is an omnibus bill, submitted to the Knesset together with the budget itself. It was originally designed to provide the enabling legislation needed to accomplish the goals set out in the introduction to the budget bill.
However, over the years, the arrangements’ bill has become a monster legislative package of reforms and other items that have nothing to do with the economy that, if they were submitted individually, the civil service planners know in advance would undoubtedly be buried or held up in committee at the urging of one lobbying group or another.
By packaging all this legislation together and by making passage of the budget also dependent on the passage of the arrangements law, the civil servants have been able to introduce major and necessary reforms. However, this has also lessened the capacity of the Knesset to exert oversight over the government.
To create a sense of urgency, a law was also passed stating that the budget had to be passed by December 31. But if that was impossible for one reason or another, the budget debate could be extended to no later that March 31. Otherwise new elections had to be called.
However, at about the same time that all these reforms were taking place, a whole series of other, seemingly unrelated events were also underway; and these events ended up undermining any and all efforts at ensuring that there would be real, long-lasting changes in the economic infrastructure.
The first, but not necessarily the most important change was the decision by the Likud to invite the ultra-Orthodox to join the government for the first time. Their presence in government changed the nature of the government and the budget debate beyond all previous recognition.
As I have mentioned many times in the past, the ultra-Orthodox are ideologically anti-Zionist. Therefore they have no political stake in the success of the secular Zionist experiment. They really don’t care whether the government’s management of the economy is a success or failure. Their only interest in joining the government has been to foster blue laws, find jobs for their otherwise unemployable cronies, protect their interests from the demands of encroaching modernity and, especially to extract funding for their rapidly-expanding constituency and institutions.
This has had enormous economic repercussions. First, by elevating lifelong Torah study to the socially-acceptable level of “work,” the ultra-Orthodox have reduced total national productivity. As well, their refusal to teach the core curriculum has meant that many skills needed by the economy, from computerized tool and dye makers to agricultural workers must now be imported. Welfare payments to the unemployed have meant that not only do the ultra-Orthodox not pay taxes, they remove available cash from the financial pool used to pay for services needed by the rest of the country’s citizens.
At the same time, an internal revolution was taking place in the National Religious Party. Quite quickly, the party was taken over by the so-called “Young Guard.” At this point, the NRP shifted from being a party primarily interested in using its electoral power to resolve social and religious issues to its one seemingly interested only in funding settlement in the occupied territories.
As well, third event was taking place…hidden in the bowels and corridors of the Knesset. The business of being a professional lobbyist expanded enormously. Now, those with money were at a distinct advantage in the battle for the allocation of government funding for major project such as infrastructure.
Maybe, most importantly of all, without a Labour government to protect it from its own incompetence, the Histadrut, which was the second largest employer in the county and which ran the largest industrial conglomerate, was proceeding blithely to the point of economic and moral collapse. It continued to make a lot of noise, but its membership list continued inexorably to collapse. It became less and less interested in and more and more unable to defend small workers because it was becoming increasingly dependent on the support of powerful works committees at government-controlled monopolies for its very survival.
If the needs of the guys and gals working in cut-throat, open, competitive markets now came into conflict with the desires of the monopolist workers, it was the monopolist workers, who were earning two to three times as much as anyone else doing equivalent work, who would now invariably get the support of the Histradrut.
And last, but certainly not least, the advent of party primaries in the largest political parties sent all the candidates for office running around seeking funds to pay for their campaigns. This gave those with open cheque books unprecedented access to those who would be deciding how much tax money the government would try to extract from companies…and how that money would be spent. In other words, some Knesset members effectively became some companies’ paid representatives in government.
In total, what all these changes in Israeli society meant was that the government very soon became a federation of narrow sectoral interests.
Unfortunately, this change in the nature of Israeli democracy led many people to assume that the competition between the seemingly innumerable, narrow interest groups would bring about balanced decision-making.
However these analysts and pundits failed to recognize that one sizeable group—the middle class mainstream—was not a member of the governing federation, and therefore it had no way of influencing the final draft of the budget because it was largely absent when the budget was discussed.
Eventually, the secular middle class did find its voice in the protests that broke out in the summer of 2011. I emphasized that those demonstrations were by the secular middle class because the religious middle class, a particularly narrowly-focused sectoral group, feared that the money needed to resolve the problems the middle class was facing would have to come from the monies allocated to the settlements in the West Bank. So, they refused to take part in the protests.
Budget debates, therefore, began to look something like this: Certain items, such as salaries, pensions and debt repayments, which were largely fixed and which took up a little more than a third of the budget were passed without any real thought. The Defence budget, which kept growing inexorably, took up another huge chunk of cash. Long-term commitments, such as maintaining legations abroad, building schools and maintaining hospitals ate up the bulk of the remaining available funds.
As a result, the budget debate eventually degenerated into fights between narrowly-based self-interest groups for whatever funding scraps could still be found. Precisely because these fights were so heavily reported, most people assumed, as I said, that the major issues facing the country were somehow being addressed.
That assumption too turned out to be false. One of the major reasons was that the Labour party could never accept that it had lost an election. It therefore tried by every means possible to join every government that was formed. In order to do so, it, effectively, could not afford to formulate a policy on any subject under debate lest it find itself in the political wilderness without a single publicly-funded car and driver to be found anywhere. As a result, for most of three decades there was no effective opposition available to critique the government’s spending plans—and no thoughtful opposition in a position to posit spending and taxation alternatives.
The current feral opposition by many party Labour Party functionaries to party leader Shelly Yachimovic’s decision to build a real opposition party for the first time is evidence of how deeply embedded these beliefs continue to be.
Even worse—far worse—every government, with the exception of the one led by Yitzhak Rabin decided not to come up with a social policy to guide it and police it when it had to decide how to spend the discretionary funds available.
The situation was made even worse by the fact that the civil servants were neither trained nor mandated to enunciate a social policy. Their mandate was restricted to ensuring that the basic budget provisions would not be breeched. Dealing with growing income inequality or the dramatic increase in poverty levels was not seen by these officials to be part of their job.
This perception then led them to engage ever more intensively in the goat farming business. As part of that programme, they began suggesting increasingly outrageous ideas on how to keep the deficit under control. Because of carelessness on the part of Knesset members, some of these suggestions were actually adopted.
For example, suggested cutbacks in funding that were adopted meant that whole areas of basic public need eventually ended up being ignored completely. Hospitals began to collapse for lack of funding. The fire department was left understaffed and underequipped. The county was left without alternative water supplies in times of drought. And the country was even left without the means needed to fight the Second Lebanese War.
Instead of thoughtfully assessing which spending issues should be prioritized, the budget debate took on the form of a play in which the minor coalition parties, which now controlled the passage of the budget package, spent most of their time rushing around, as if in some farce, opening and slamming shut the doors to the Knesset finance committee, yelling slogans in support of their narrow interests while trying to avoid any substantive discussion of national issues.
Invariably, in their search for ways to increase payments to their narrow interests, the first item the politicians plundered was the budget provision labeled “reserves.” The reserves had two purposes. The first, following British parliamentary practice, was to act as a hiding place for the budgets of the secret services. The reason is that reserves, by their nature cannot be divided up into line items because you don’t know what you are reserving money for; and the secret services also oppose any detailed discussion of what they do. The secret services’ slush funds, of course, couldn’t be touched. But the second part of the section on reserves was designed to provide a store of ready cash that could be called upon immediately for use in case of emergencies, such as wars or natural disasters.
These acts of piracy by the politicians meant that the finance ministry officials had to find other places to hide the money intended for use in emergencies. For people like me, this meant embarking on a treasure hunt each year. Sometimes the task was merely wearying. But occasionally, it turned out to be great fun as I tracked the blows and feints of the politicians and the civil servants as they did battle far from the eyes of the general public.
For example, one year there was a provision in the budget for the upgrading and extension of a rail line. That looked like a perfectly simple matter unless you also knew that construction approval by regulators for that line was being held up by a lawsuit. Chalk up one reserve fund oblivious to most of the world.
In another real-world case, a seemingly innocuous line item allotted the same amount for debt repayment as had been set aside the year before. But, because interest rates had already fallen and were expected to fall even more in the coming fiscal year, part of this seemingly innocuous line item too was also being set aside as a reserve item.
My favourite example of these shenanigans was a ploy whose motives may have involved revenge, or elements of a prank or a practical joke. I’m not sure which.
In any case, what happened was that, as was their wont, the ultra-Orthodox parties managed to force through a spending proposal that was intended to provide unprecedented special advantages for their young married couples. The bill was intended to provide 1,000 low-interest government mortgages to that designated group. Among other things, the law laid out criteria for deciding who could apply for the mortgage. The criteria were such that only the ultra-Orthodox who had gotten married early and who had not served in the IDF could apply.
The finance ministry officials dutifully did as they were told and included the provision in the next year’s budget. In keeping with the politicians’ demands, they also set the interest rate for the loan at half a percent less than the bank interest rate was on the day the measure was originally passed.
Fine. Except for one thing. The Haredi politicians were horrified, and apoplectic by the result. Towards the end of the first fiscal year after the bill had been enacted, they went looking for a way to boast to their constituents and to their rabbis about all their successes. Among other things, they asked for an accounting on how many mortgages had actually been provided. The answer came back: Only two had been approved.
The reason? Since the mortgage bill had been passed, bank rates had fallen dramatically—as most people had expected; and bank mortgages were now cheaper than the government ones.
For some “inexplicable” reason no one in the finance ministry had thought it necessary to inform the Haredi Knesset members that the interest rate on the government mortgages might need updating. In the meantime, that line item too had provided a very nice and cozy reserve fund.
But now let’s look at how the budget game has played out his year.
If you have been following the news lately, you will know that Knesset members have demanded, and the State Comptroller has agreed to investigate how the budget deficit grew to such enormous proportions. Well, let me tell you something. No such formal investigation is needed. Last October, Shaul Mofaz was the leader of the opposition, and in a Knesset debate, he revealed that the budget deficit had already reached 40 billion shekels—almost dead on. So all you have to do is to ask Mofaz how he knew what nobody else knew.
But if you are afraid that this could become a political matter, God forbid, there is another way to uncover the reason—and that is to trace how government budgets are actually formulated.
Establishing an up-to-date format for any new budget takes about 6 months of staff work. Unfortunately, when it is presented to the cabinet for review, it is already usually packed with flaws. That is because each budget is invariably based on outdated data that are, in some cases, 2 to 3 years old. That is because some surveys undertaken by the Central Bureau of Statistics are what are called “longitudinal studies,” that are only taken every three or our years. And in Israeli society, things sometimes change very rapidly.
That can create extraordinary distortions in spending programmes. Take the current budget for example. One of the things that former Finance Minister Yuval Steinitz most prided himself on was his decision to introduce two year budgets. Not only did this reduce the already almost-insignificant role of the official opposition even further, it made introducing mid-course corrections in taxation and spending almost impossible.
So, because of the election, we are now well into the third year of a two year budget. Think of what Steinitz’s brilliance hath wrought. The budget was drafted beginning in 2009, based, in part, on data from 2007. It as passed in 2010, before the Arab Spring and the overthrow of Hosni Mubarak, before the Syrian civil war, before the massive doctors, nurses and social workers strikes, before the huge street protests and before the Trajtennberg report—all of which have led to huge, unanticipated government expenses.
Not only that, two mammoth new expenses, for which the government did not even designate a source of funding, ended up leading to a significant increase in the growth of the deficit. Free schooling for 3 and 4 year olds was introduced, and, depending who you believe, 11-13 billion shekels was spent on preparing for an attack on Iran.
However, other line items that could have been cut, had there been an agreed social policy, were ignored. For example, because of the change in the strategic map of the Middle East in the last two years, Israel no longer needs the vast number of Merkava tanks that it continues to produce. Today, there is no Arab country or coalition of Arab countries capable of launching an old-fashioned open-field war against Israel.
However tank production lines have not been shut down because many factories making parts for the tank were established in development towns. And because there was no social policy, no government was able to create conditions that would encourage companies to establish businesses there if the Merkava programme were shut down.
But, let’s get back to this year’s budget. As I go through my tale, always keep in mind that most of the monitoring of the previous year’s budget and the data necessary for planning for the future are available these days precisely because of reforms that were introduced, via the arrangements bill, when Bibi was the finance minister under Ariel Sharon. In other words, the politicians cannot say without a smirk “how were we to know?”
Up until the time that Bibi took over the finance ministry, ministers were able to mess around with their accounting by, for example, spending money, but only paying for the item or service purchased after the next year’s budget had been introduced. In other cases, ministries would award a tender to a tycoon based on a price that everyone knew was ridiculously low. But once work had begun on the project, the contractor could and would demand a higher price. Invariably a revised, much higher price was agreed upon. And the ministry’s budget grew commensurably.
All that hanky panky ended when Bibi, as finance minister, appointed Yaron Zelikha as the ministry’s accountant general. Zelikha succeeded in changing the rules so that a member of his ministry’s accounting staff was stationed in every other ministry—except the defence ministry. Data gathering improved immeasurably; and the Israeli government was no longer the body in Israel with the worst record of paying its bills on time. Not only that, if a tycoon submitted a bid just to get a contract—with the intent of revving the price upward after the work had started—he was now forced to complete the work, at a loss, under threat of court sanctions.
But the biggest reform of all came when, after years of costly delays, the finance ministry finally began using a new computer programme, also, incidentally, called the Merkava, that had cost hundreds of millions of shekels. This programme was able to give an instantaneous read-out of what had happened to every agora that had passed through the ministry’s accounting system.
That system alone should have provided fair warning of the dire straits in which the economy had descended last year. And, in fact, the projections it produced were probably the reason why the government did introduce a series of new taxes in August and September 2012. But that attempt at emergency first aid ended in early October after new elections were called.
From that moment on, no information of any substance was released until after the elections were over and the deficit had grown outrageously. The Knesset members could have asked for a continuing read-out of Merkava computer data.
The problem was and is that this cyber system is too good for its own good. Knesset members are terrified of it because it can produce data sets that are politically embarrassing beyond belief. Therefore, since the system was introduced, all finance ministers have avoided ordering up all sorts of surveys that the system is capable of providing. And these ministers have also forbidden Knesset members from using it for going on fishing expeditions.
For example, one of the things every government has avoided like the plague has been any attempt to do an accounting of how much the settlement of the occupied territories has cost. Budgets for the project have been divided up among so many ministries and agencies as to be untraceable—except by using this programme. In other words, should an anti-settler politician get access to the programme, the result could be a political disaster for the party in power.
That fact may also have determined why Bibi has acted as he has throughout this crisis. During his period as finance minister he showed that he was a great manager of the country’s treasury. However, since becoming prime minister, he has been more interested in preserving his position as prime minister than in doing what he knows is the right thing for resolving the current crisis.
Yair Lapid has said that he has set his eyes on becoming prime minister within two years. His Yesh Atid party and Habayit HaYehudi, with whom he is allied, already have the same number of seats in the Knesset as the Likud/Yisrael Beiteinu grouping. Therefore Netanyahu sees him as a constant threat
Lapid’s spectacular success in the last election was the product of a brilliant strategy. He recognized that the government was a federation of narrow minorities. And so he fashioned Yesh Atid as yet another minority party—but one representing the biggest minority in the country, the Middle Class. This was the same middle class that had taken to the streets in the summer of protests.
Unfortunately for Lapid, although he had run a smart campaign, he had never had to put together an operative plan for how he would help the middle class when he took over the finance ministry. For example, he had no package of economic reforms ready to be introduced. He has thus been almost totally dependent on the ministry civil servants for advice. One of the reasons why the current budget proposal has elicited so much criticism is that the civil servants simply handed him every goat that had been rejected by finance ministers in the past.
Lapid therefore had the choice of formulating a budget for only this fiscal year, and then introducing a huge reform budget for 2014, or waiting a bit longer, until the 2015 budget comes up for debate in a years time. He has chosen the latter option, which will give him more time to come up with something more coherent.
The current budget debate therefore must be seen as the first shot in the next election campaign, currently scheduled for 2017. Finance Minister Yair Lapid, has already announced that he intends to run for the prime ministership at that time.
However, the Israeli public has always voted for political leaders based on their experience as political operators and their knowledge of security issues and/or economics. Lapid is inexperienced in all three fields. To prove himself, he will now have to make his mark by launching a series of economic and social reforms, some of which have stymied more experience politicians than he.
Polls show that the public is seeking reforms that will confront growing poverty, income inequality, and the cost of living.
However, the most difficult and economically-important issues that Lapid may eventually have to face are: How much gas to export from Israel’s newly discovered offshore fields, and how to revise the budget of the defence ministry. Major sales of gas might solve the government’s current revenue problems. However, the influx of foreign currency may lead to a revaluation of the shekel—which would hurt all the other exporters.
Maybe the biggest goat of all in this year’s budget is Lapid’s promise to cut the defence budget by 3 billion shekels. That budget has grown from 42 billion shekels in 2005 to 57 billion shekels today and has resisted all attempts at cutbacks during budget time. Worse still, every year for the past decade the defence budget has been increased by billions of shekels by having additions to its budget passed in mid-year.
Reform of the defence budget will undoubtedly require a top to bottom reassessment of the threats Israel can be expected to face, the military’s likely missions in the years ahead, the training the soldiers will require, and the matèriel that will need to be purchased. At the moment, Lapid knows nothing about any of these subjects. So, he has a lot to learn and will need to be a speedy learner.
In the meantime, we will have to live with the current budget proposal, which seems to contain the worst of all possible worlds. It will put an undue strain on the poor by, for example, raising the regressive VAT tax. Taxes for Lapid’s precious middle class will also rise by an average of 7,800 shekels for a family of five. And the reforms needed to produce long-term economic progress and cut consumer costs will be delayed indefinitely.