The Israeli Budget: Yes, You Can Fool All the People All the Time


To most people, there is nothing more boring than reading a budget or listening to a budget debate.


That is unfortunate because national budgets can be endlessly fascinating. They are probably the best objective mirror a country can produce about where it is at, what its priorities are, where it wants to go, and how it intends to get to where it wants to go. A budget that doesn’t add up, or is confused about how government revenues should be earned and how that money should be spent, is the best evidence there is about whether the government is chaotic…and worse still, whether it is pandering to rather than leading the public.


In many countries, but especially in Israel, the numbers that appear at the end of the fiscal year, when the national accounts are published, are invariably very different from those that were published when the budget was originally passed. All too often those numbers end up undermining and even contradicting the words thrown out to the press and used in public forums throughout the fiscal year by political spinmeisters…because while words are cheap, national accounts are the record of whether people actually put their money where their mouths were.


I cannot stress enough the usually-unrecognized fact that each year Israel actually produces a plethora of budgets; and that is the primary reason why, when the national accounts are published at the end of the year, they usually bear only a passing resemblance to the document the government presented to the Knesset for approval the previous fall. In Israel, when the two documents are compared in detail, the resulting data present a dismal, even frightening portrait of the Third Commonwealth—what it is like now, and what it may very well become.


For those seeking a quick bottom line, I can say without any fear of contradiction, that Israeli budgets, regardless of which parties are in power, have invariably demonstrated that Israeli governments have been unable to define what social values the country stands for, what sort of society they want to create, what their specific, practical goals are, and how goals that are enunciated in words, can actually be achieved.


About 82-83 percent of any budget is fixed in advance because of the need to pay for such fixed costs as the interest on the national debt, salaries and pensions to civil servants, as well as previously-made commitments to municipalities or contractors. The other outlays, however, often vary widely from year to year, and, as I have already mentioned, from the beginning of the fiscal year to its end. For example, this year, 4.2 billion shekels had to be added to the defence budget to pay for the war in Gaza, a costly enterprise that had not been anticipated at the beginning of the year. But there are also many other changes that are made to the budget during the year that the public is largely unaware of.


So what I would like to do now is to take you on a tour of the budget process, as it proceeds each year. The thing to keep in mind most as I proceed with my narrative is that Israel’s serially dysfunctional governments and Knessets have distorted the economy to such an extent that, in the best years, much of the economic planning contained in the budget is devoted to overcoming or at least ameliorating some of the most socially-destructive elements in the economy that the politicians had previously introduced over the years.


My primary focus will be on one statistic. The Central Bureau of Statistics is now projecting that GDP growth next year will be 2 percent. Since Israel’s population growth rate is 1.9 percent per year, that means, in effect, that if the CBS estimate is correct, the growth in GDP per capita next year will be virtually nil. The statistics just published indicate that, during the third quarter of this year, Israel actually had negative economic growth.


Virtually all economists believe that Israel has the capacity to grow its GDP buy 5-6 percent per year, if the economy were managed properly. Everything I point to from hereon in will be directed at explaining the gap between the economy’s potential and the current dismal reality.


I’ll start with some of the major distortions in the economy. All are man-made. So that you don’t think I’m being unfair, I’m going to use only the data assembled by the World Economic Forum, the UN, official Israeli bodies such as the Bank of Israel and the State Comptroller and the World Bank. All the data indicate that when it comes to the activities generated by the Israel’s middle class, such as the quality of R&D, willingness to innovate and capacity to innovate, Israel stands among the top three countries in the world. However, when it comes to almost any activity in which the government or the politicians have a role, the Third Jewish Commonwealth has become a third world country.


According to the World Economic Forum, Israel today stands 79th in the wastefulness of government spending. One reason for this is that it also stands 79th in the world in terms of spending on political favourites at the expense of the country’s majority. No wonder, therefore, the government here stands 81st in the world in terms of the public’s trust.


But that’s the good news. From here on, it’s all downhill. You see, not only does the government make a botch of things, it prevents almost everybody else from doing a good job. Take red tape, or what is usually called “government regulation,” for a starter. The World Economic Forum puts Israel at the 116th among nations in the amount of Red Tape its working citizens have to confront. The World Bank points out, for example, that it takes an average of 14 days to get through the red tape in order to set up a business in Israel. That compares with only 1 day in New Zealand, 2 days in Australia and only 4 days in Hungary.


Arguably, the biggest distortion is that the shadow economy—that part of the economy that operates out of sight and out of the reach of the tax man is estimated to amount to roughly one quarter of the GDP—or about 200 billion shekels a year. The World Bank estimates that Israel stands 93rd out of 189 countries when it comes to its people paying all the taxes that potentially could be collected.


Some, but not all of the tax evasion and tax avoidance comes from organized crime. But according to the Forum, Israel stands only 75th in the world in the battle against organized crime. And, by the way, when it comes to all other police services, it also stands a paltry 69th.


Much of the rest of missing money comes from people who believe that without cheating the tax man on things like VAT owed as a result of a plumber or electrician’s visit, they cannot make ends meet


It would seem obvious that a good way to whittle that tax avoidance down would be to hire more policemen and more tax assessors. But the government claims that there is no money for that. As you will see throughout the rest of my remarks, it would appear that that this so-called “right-wing” government does not accept the basic principle of capitalist economics—that you have to invest if you want to make money.


For example, even if a tax case does get to trial, such trials can last 7 years or more. That is hardly a way to generate deterrence. So frustrated do the overworked prosecutors become, that all too often they will agree to a plea bargain that results in only a relatively small fine. For example, according to the State Comptroller, a kabbalist rabbi who specializes in selling amulets and blessings, had a bank account amounting to 867 million shekels, but had never paid an agora in income tax. In the deal he finally struck with the tax authorities, he had to pay back only 40,000 shekels. That is not the sort of thing that would encourage the little guy to make a special effort of his own to reduce the national debt.


An obvious solution to this problem would be to hire more judges and prosecutors—but there is no money for that either…obviously because, as the Forum found, it has to go first to satisfying the short-term or wasteful needs of political favourites.


The overcrowding in Israel in courts is so bad that the World Bank puts Israel in 93rd place when it comes to enforcing contracts—the basis of all business dealings, capitalist or otherwise.


Overall, and largely because of the government’s actions and inactions, the Israeli economy is only half as efficient and half as productive as the American one. That is one of the primary reasons why prices for almost everything here are higher than in other developed countries. In general, Israel stands 76th in the world in terms of productivity.


The question foreigners keep asking is: Why then, if increased productivity is the key to increasing everyone’s wealth, and if increased productivity could be fostered by simple, rational and sane government policies, why don’t Israelis protest more in the streets just as they did in the summer of 2011? Well the dirty secret is that to pay for even the basics, Israelis, despite all the Jewish holidays, invariably have to work longer hours than most other people in developed countries. They simply don’t have the time to engage in extended protests. Only Mexicans, among the OECD nations work more hours per year. The problem is that when you measure the amount of GDP produced per hour worked, Israel is in second last place among OECD countries. Israelis produce 33.7 dollars per hour worked as compared with 86.5 dollars in Norway and 71.1 dollars in Ireland. And unlike Norway and now Israel, Ireland has no fossil fuels to sell.


Why is productivity so low? Well, for one thing, according to the Forum, Israel stands 126th in the world when it comes to domestic competition for consumer spending, and 143rd when it comes to the dominance wielded by just a few firms. Nineteen families control more than half of the companies on the Tel Aviv stock exchange; and they have no real desire to compete with each other. Among the many other incentives they have to limit competition, the managers of these big companies also get extra pay when they are invited to sit on each other’s boards.


In addition, it’s not unusual for high-ranking politicians and civil servants who are charged with overseeing or legislating aspects of these magnates’ businesses, when they retire from their government jobs, to get new employment positions with these oligarchs at wages that are far higher than they got while working in government. They thus have an immediate incentive, while they are still in public service, to cultivate and to be kind to big business.


But not all the blame can be put on the oligarchs and their minions. Monopolies and cartels are common everywhere in the economy. The Histadrut, the so-called protector of the working man and woman is one of the most flagrant protectors of personal and group privilege. It vigorously fights the breakup of government-run cartels and monopolies because it is controlled by those unions in government-owned monopolistic businesses such as the electric company, the national water company, the ports, the country’s only international airport and many others. Unsurprisingly the workers in these businesses get wages that are far higher than those prevalent in the rest of the economy for the same sort of work.


And how does the Forum rate the government’ efforts to control monopolies? Not very highly. It puts Israel at 118th among countries doing battle with monopolies and cartels.


Another major reason for the lack of productivity is that the road system and the public transportation system in Israel is so poor that Israel has two and a half times the road congestion as is the average in the OECD countries, even though it has half the vehicles per capita. It can take longer to go by bus from Holon to downtown Tel Aviv 12 kilometers away than it takes to go from New Jersey to Manhattan 60 kilometers away. This makes it much harder to match people with available jobs and raises the cost of delivering consumer goods. Why is the transportation system so poor? No money, of course—or so we are told.


Maybe the best example of how low productivity affects Israelis is the construction industry. The average Israeli now finds that he or she simply cannot afford to purchase a new home. Today, according to the Israeli Housing Ministry, it costs an average of 157 monthly salaries to buy a three-bedroomed flat in Israel, as compared with 110 salaries in high-cost London and only 62 salaries in the US. I’ll go into the issue of how taxation raises the cost of an apartment to an absurd degree in a moment. But for now, I’ll just focus one aspect of the process of actually putting up a building. Part of the current exorbitant cost of housing can be attributed to the fact that Israeli construction workers are only 40 percent as productive as their OECD counterparts.


Another, no less important factor is that government red tape raises costs enormously. According to the World Bank, Israel stands 140th in the world in the hassle required to get a building permit—up from 135th place last year. It is in 151st place in registering property, and in 103rd place when the need arises to finally hook up to electricity lines.


And then there is the issue of who is actually working in this economy. The answer is: not enough people to pay for the costs of running the country. One reason for the lack of national productivity is that the Haredim don’t work as much as everybody else. In 1979, 70 percent of Haredim worked. Today, only 26 percent do. And the proportion of Haredim in the general population is growing. The biggest problem that the Haredim create, though, is one that is rarely, if ever mentioned. Because they don’t work, and as a group they do not pay enough in taxes, in order to compensate for the lack of government revenues that this situation creates, the entire taxation system has been distorted—to the detriment especially of the secular and Zionist religious working poor. I’ll come to that issue too in a moment.


A major factor in any economy’s growth level is consumer spending—and especially what is called “discretionary consumer spending.” This is the spending that people do after they have paid for the basics like food, housing and clothing. According to the latest figures published by the National Insurance Institute, however, the median income in Israel is only 5,500 shekels. Since, on average, according to the Central Bureau of Statistics, an Israeli family of four needs a net income of at least 11,848 shekels just to cover normal living costs, most people cannot get by on what they earn. Those who keep their expenses to an absolute minimum, even if they can get public housing (which, increasingly people cannot find because none is being built) obviously don’t have the money to drive economic growth.


Another huge distortion that the highly-respected Taub Center for social research has found is that roughly a third of Israelis can only get jobs that pay the minimum wage of 4,300 shekels per month. However, half of those who should be paid at least the minimum wage, do not get it. Why don’t these folks get the minimum wage? Simple. There aren’t enough people to police the law. Why not? Because the government says it can’t afford to hire more wage inspectors.


Then too, there is what is called “the gender factor.” Israeli mythology highlights the days when men and women worked equally in the fields. That, of course, was always just hokum. But, according to the Forum’ latest report, Israel is in 130th place in wage inequality for men and women doing the same jobs. Only Angola is worse.


All this means is that Israel is 4th highest in the developed word in the level of overall poverty. 35.6 percent of the population cannot cover even their basic needs.


There are two main pockets of poverty in Israel—among the Haredim and among the Arabs. That was not always the case. It was only after the Haredi parties joined the coalition government in the late 1970s that, they were able to manipulate their political leverage to the point where, in effect, the rest of the Israeli population was forced to involuntarily provide them with “Halukah”—the stipends given voluntarily in the past to Torah scholars.


But even if we ignore these two large groups, the fact is that twenty percent of those who live below the poverty line are normal, secular Jews. In the 1980s, at the height of hyperinflation and virtual economic collapse, only 8-9 percent of those people in this socio-economic group lived below the poverty line.


And never to be forgotten is the impact the banks have on the economy. I could spend thousands of words just describing the negative effect the banks have on the Israeli economy. But I’ll suffice with just one major example. About 80 percent of the salaried jobs in this country are produced by small and medium-sized businesses. Banks here are now paying zero interest rates on deposits. They then lend that money out at rates of about 3.5 percent interest to major corporations. But small and medium-sized firms have to pay a crushing 7-11 percent interest.


Since real wages—in other words the purchasing power of an average pay packet—has dropped by 9.5 percent over the past decade, the average Israeli’s savings amount to precisely 121 shekels. And you have to take into account that this is an average that is created by including in the calculation the millions of shekels in savings accumulated by the very wealthy.


With all that as background, I’ll now turn to a perennial hot topic—revenues and taxation. Israel supposedly has a fairly just system of income taxation. The top fifth of all income-earners pay 60 percent of all income taxes. As well, corporate taxes and capital gains taxes, which hit the rich in particular, are also relatively high. But, as they say here, that is all “Israbluff.”


In theory, at least according to the Bank of Israel, taxation makes up only 30.4 percent of GDP, as compared to an OECD average of 34.7 percent. In part, as I have already noted, that is because many Israelis don’t have the wherewithal to pay taxes. For that reason, the money to pay for the health system, education and other basic civil services has to be found in ways that are totally unacceptable elsewhere because they end up both driving people into poverty and preventing people from becoming more productive.


Because of both populism and a desire to attract the Haredim back into the work force, Netanyahu, since 2005 has actually been lowering the income taxes levelled on the middle class. However, in order to make up for that loss in revenues, indirect taxes have been raised to often absurd levels. The best known of these taxes is VAT, which is levelled on all those goods and services provided in the country except those provided in Eilat. By adding 18 percent to the cost of everything, the government, in effect, drives those who are only marginally above the poverty line back down below that line. Similarly, by cutting the payments it makes to the municipalities, it has forced those municipalities to raise property taxes, regardless of the person’s income. Then, of course, in order to pay those tax rates, merchants have to raise the prices for the goods they sell.


But that is not all. There are a whole slew of the hidden techniques the government uses to balance its books. One way is to charge exorbitant fees for goods and services that are then not written down in the books as taxes. For example, as any parent knows, so-called “free education” in Israel is hardly free. Parents here have to pay for many of the costs of a child’s education such as books, field trips, and private lessons. Free health care too is hardly that. If you don’t want to wait for up to a year for care in some hospital clinics you have to pay hefty sums for private care. Even a basic necessity such as water now costs five times what it once did. And to top things off, the government is now allowing municipalities to add a surcharge to their tax bill of up to two percent for what is imaginatively called “security services.” What additional security this payment provides is anyone’s guess.


Another such hidden tax is levelled on those parents who have a child in the army. Because the wages paid to those doing their national service are totally insufficient to cover a person’s basic needs, it is the parents who have to make up the difference This parental cost has been estimated to amount to a minimum of 1200 shekels a month. For already-poor parents, that cost can be a crushing or even impossible burden.


One of the most outrageous schemes for extracting money, and one of the prime reasons why housing in Israel is so costly is that the government runs a land sale monopoly. For years, the government has restricted the amount of land for home construction that it has been selling. This has naturally created a shortage of housing, which, in turn raises demand. Then, when it does auction land, pent up demand drives prices up way beyond what would be the case if more land had been made available. Those profits too are not registered on the books as taxes.


Taken in its all and all, 43 percent of the direct cost of an apartment in Israel is paid directly to the government in the form of land costs and taxes. Indirectly, the government raises the price of apartments even more than that because the payments that builders have to make to the banks for credit become greater because of the time delays caused by red tape. It is no wonder, therefore, that while in 1997, 72 percent of Israelis owned their own homes, today, only 58 percent can afford to do so.


If there is one single factor underlying a majority of Israel’s economic woes, however, it is the education Israelis receive today—or rather the lack of it. Put simply, the lack of investment in education in previous decades has now created a dramatic decline in the country’s wealth of human capital, and thus its capacity to grow its GDP.


According to the World Economic Forum, Israel is now in 86th place in the world in the quality of its primary education, and in 79th place in the education it provides in maths and sciences. And it is important to remember that the tests on which those placings were based, were not even given to the Haredi pupils.


According to the OECD, pupils registered in Israeli state elementary schools spend an average of 5,741 hours in class each year. That’s a lot. The OECD average is only 4,553 hours. The big difference between Israel and the rest of the world, though, lies in class size. Israel averages 26.8 children per teacher, while the OECD average is 14.5 children per teacher. In other words, despite the long class hours, Israeli students actually get less individual attention and instruction than their peers elsewhere.


The results are pretty appalling. In places like Kochav Yair, where parents have the capacity to tax themselves to pay for enrichment classes for their children, 93.4 percent of 12th graders earned a matriculation certificate. In poverty-stricken Jisr e-Zarka, only 25.24 percent did. Overall, there is a gap of 16.8 percentage points between the scores of Arab-Israeli and Jewish-Israeli students.


In Haredi cities, the situation was even worse. In Modi’in Elite, the figure was only 7.24 percent of the high school-leavers.


These low marks are an important harbinger of Israel’s economic future. A series of studies has found that once the quality of a child’s education in what are termed “core subjects” drops below a certain level, the families they create when they reach adulthood will become endemically poor for generations to come because of an economic circle that has been established. The syndrome works like this: If a child does not get an adequate education, he or she, when they become parents, will never be able to earn enough money to give their children enough educational enrichment for those children to get well-paying jobs. Without well-paying jobs, those progeny will never be able to give their children the educational enrichment they will need to get jobs…and so the cycle repeats itself endlessly.


Overall, what has happened to the country’s education system is possibly the best example there is of all that is wrong with the budgeting process. In the early 1990s, Israel was blessed with a huge influx of Russian-speaking immigrants, most of whom were highly educated. By the time the huge wave of immigration was over, more than half of adult Israelis had a university degree—the highest percentage of degree-holders of any country in the world. Among other things, these highly-educated workers filled critical job slots in high-tech and in the health services. But no plans were made for the day when these immigrants would begin to retire.


So, for example, while the number of university students has risen two and a half fold since 1973, only one new university, that in Ariel, was created. And the total number of senior faculty in research universities, as opposed to colleges, grew by only 9 percent.


The impact of this change can be seen almost everywhere, but nowhere more than in health care. For years, the country relied on the self-taxation of parents who were willing to pay high fees to send their children to learn medicine in places like Hungary and Romania. But that was still not enough to fill the growing shortage of health care professionals. And so today, Israel is facing a dire shortage of nurses and doctors in some critical fields such as pediatrics and internal medicine. Were it not for the fact that a disproportionate number of Israeli Arabs have now chosen to study medicine abroad, the situation would be even worse.


All told, today, only 44 percent of Israelis aged 25-34 have a bachelor’s degree. In other words, today, fewer Israelis have a university education than did their parents. According to the OECD, 65.7 percent of South Koreans, 58.5 percent of the Japanese and 56.9 percent of Russian adults hold university degrees. Since fewer than half of Israelis get a matriculation certificate these days, there is very little chance that Israel will ever regain its previous standing. In other words, Israel is almost unique among developed countries in that the younger generation is less educated than the previous one. Even with the increase in education spending that will begin next year, it will take at least a generation before the country recovers.


And despite all the brouhaha given to immigration, especially from increasingly anti-Semitic Europe, don’t expect immigrants to fill the job slots that the country will need. According to the Forum, Israel today stands 83rd in the world in its capacity to attract the educated talent it needs. And the brain drain is increasing because the children of immigrants from the former Soviet Union find that they are not being accepted as Jews by the religious establishment. They thus do not develop emotional ties to the country, and so feel few qualms about emigrating.


How did all of this come about?


I have long tried to show that the Israeli government is a federation of political tribes. Each tribe that is represented in the coalition government is interested first and foremost in funding its own members’ interests. Only afterward are the needs of the majority taken into consideration.


Each year, the budget for the coming year is prepared by the Finance Ministry by the end of June. At best, the cabinet then spends no more than three sessions debating the provisions of the budget. That debate focusses almost entirely on who gets what. To the best of my knowledge, there has never been a debate specifically designed to lay out long-term national priorities.


The budget is then usually presented to the Knesset after the Simchat Torah holiday, and, by law, is supposed to be passed by December 31. Since the hyperinflation crisis in 1983, it has always been accompanied by a unique Israeli invention called “the arrangements law,” which is intended to be an omnibus bill containing the enabling legislation necessary for the implementation of the provisions in the budget itself.


In the past, the arrangements law was actually a hodgepodge of all the economic reforms that the government wanted to introduce, but which it knew in advance it would have difficulty in getting passed using normal Knesset procedures. The idea was to overwhelm the Knesset members with so much legislation that they couldn’t really give each item proper consideration before the December deadline. However, as a result of a recent Supreme Court decision, today, the arrangements law can only contain provisions that relate directly to the budget.


As I noted before, the one thing to keep in mind most as I discuss the budget itself is that the budget law and the arrangements law passed by the cabinet—and the amended versions passed by the Knesset—invariably bear only a passing resemblance to the way the money is actually earned and spent.


That great huckster PT Barnum was only partially right when he declared “You can fool some of the people all the time. And you can fool all of the people some of the time. But you can’t fool all of the people all of the time.” Even the man who searched the world for all the freaks mother nature had conjured up could not have conceived of the fact that when it comes to the Israeli budget, all the people do get fooled all of the time.


The process begins even before the budget proposal is presented to the cabinet. The finance ministry draws up a projection of how it expects the economy to behave in the next fiscal year, and therefore what the government can anticipate the revenues will be. In the old days, prior to the turn of the millennium, that document was drawn up in conjunction with the Bank of Israel, whose governor, by law, is also the government’s economic advisor. The Bank stopped cooperating and began preparing its own projections, however, when it found that the ministry of finance incessantly, and with a fervor that would have done a Haredi rabbi proud, religiously massaged the figures to satisfy the political needs of whoever was finance minister at the time.


That massaging continues to this very day. As the central bank pointed out in its critique of this year’s budget, in order for the projected budget deficit not to look too high, the finance ministry has included several projected sources of income for next year that are purely imaginary. For example, the proposed budget for 2015 now projects billions of shekels in revenues next year from the privatization of government-owned companies. The thing is: privatization projects take years to plan and execute. For example, the privatization of Bank Leumi has been underway since 1982 and has still not been completed.


Another thing that is always included in the budget and the arrangements law is a package of what are called “goats.”


The name comes from a Yiddish folk tale. A poor man with 13 children lives in a one-room house and can no longer tolerate the noise and the mess. He goes to his rabbi and asks the rabbi what he should do. “Bring a goat into the house,” the rabbi says.


The man dutifully does so. Two weeks later, he goes back to the rabbi to tell him that the situation has gotten much worse. The rabbi tells him that now is the time to take the goat out of the house. The man comes back to the rabbi the next day. “You can’t imagine what happened,” he man says. “The house is so quiet.”


So it is with Israeli budgets. The finance ministry inserts all sorts of provisions that it knows in advance will be totally unacceptable to Knesset members. This then enables the member to make great hay in the media about how they are protecting the public’s interests. In the meantime, because they focus only on the goats and those measures that most affect the interests of their political tribe, they ignore many other, far more important provisions.


You have to understand one fundamental thing about Israeli budgets. The professionals in the finance ministry are mandated to make the numbers in the budget add up. Because of political manipulation, such as the massaging of projections that I just mentioned, that is rarely possible. Therefore, these boffins have to resort to all sorts of subterfuges. For example, each budget contains a provision for reserves for unexpected events such as natural disasters or wars. However, invariably, the Knesset finance committee members end up committing the reserve to cover current spending even before the budget is passed. For that reason, the ministry officials have to find all sorts of imaginative ways to hide the real reserve. One year they did it, in part, by allocating funds to build new railway lines even though the tenders for those rail extensions had not yet even been published. Another year, they knew that interest rates were going to go down, but nonetheless kept the debts repayment section of the budget at the same level as the year before.


However, even that sneaky system doesn’t always work. Prior to the last election, the then finance minister Yuval Steinitz, who is a great political manipulator but knows nothing about economics, presented a budget whose numbers had been massaged so thoroughly that when Yair Lapid, the new finance minister, took office he found a gaping budgetary deficit of 40 billion shekels.


How do governments handle such situations once the mismanagement of public funds can no longer be hidden from the public? Invariably the cabinet then calls for across-the-board spending cuts. That means, though, that all the distortions in the budgets remain intact and no effort need be made to set out national priorities. That is precisely how both the education and the health budgets were cut to such low levels in the first decade of this millennium.


And now we come to one of the biggest ruses of all—off-budget spending that can amount to hundreds of millions of shekels in any one year. For example, successive governments have always claimed that they have allocated development budgets to outlying areas based on the principle of one-third going to the north of the country, one third to the south and one third to the West Bank. That is a total lie. Much of the development budget for the West Bank is hidden in provisions in six different ministerial budgets. But, no less importantly, hundreds of millions of additional funding are funneled through two organizations—Keren Kayemet L’Yisrael and the settlement budget of the World Zionist Organization. Nobody knows how much money the Keren Kayemet sends to the West Bank because its budget isn’t published. However, it has been estimated by some to be about 800 million shekels per year. The Molad organization has estimated that of the 199 million shekels that the WZO distributed last year, 149 million went to West Bank Settlements.


And finally last, but not least, each year billions of shekels are redistributed by the Knesset finance committee after the budget has been passed. In some years, this has amounted to as much as 40 billion shekels. Most of this reallocation is done when very few members of the committee are present at a meeting, and so it goes almost totally unnoticed in the media.


What happens more often than not is that these transfers are made following back room deals that provide distinct advantages to political insiders. For example, during the war in Gaza, the finance ministry asked the committee for an additional appropriation of 1.2 billion shekels to cover the cost of the war up to that point. In order to persuade committee chairman Nissim Slomiansky to speed up the process, Finance Minister Lapid had little choice but to agree to an additional payment to the council for West Bank settlements of 20 million shekels. No explanation was given for how that money would be spent. It was just handed over.


Given all these facts, it is unsurprising that Israelis, today, are 426 billion shekels in debt—to the mortgage companies, banks, credit card companies and even the pension funds from whom they have borrowed to finance consumption now…often without thought to what they will need in the future.


If this trend continues, Israel could soon face a major debt crisis that can only be remedied by government policies adopted now that can create more productivity. Unfortunately, it now appears that we will be entering yet another election period during which the government is more likely to adopt easier, but counter-productive policies such as raising the minimum wage without increasing policing of that regulation and without installing the infrastructure that would foster a rise in productivity.


One Comment

  1. Robert Raful says:

    Another major economic lesson from the Master. Only one question: Isn’t there one politician or party willing to address Jim’s analysis ?

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