Monday 3 June 2013

Poacher Turned Gamekeeper

New Israeli finance minister Yair Lapid is learning that it is much easier to be criticising from the sidelines, than it is to be taking action from within the government.  Having spent much of his life as a journalist and TV presenter which had him criticising governments and government policy, his switch into politics has given him the opportunity to prove his own credentials.  The poacher turned gamekeeper is discovering that life in the political goldfish bowl is not quite as easy when he is having to fend off the arrows, as it was when he was shooting them.

Lapid has finally presented his budget for 2013-2014 for government approval.  When he was playing politics from outside governmental circles as a journalist, he was mostly focused on what the government was doing to improve social equality, and to address the needs of the weakest elements of Israel's society.  In his position as the minister of finance, he now knows that this nut is a tough one to crack.  How does a responsible government work to improve social equality, while also working to close the huge budget deficit and finance the mountain of government debt all at the same time?  The resulting budget prepared by Lapid and approved by the Knesset is much more about fiscal responsibility, than it is about helping the poor and the weak in Israeli society.  It includes increased tax rates, increased VAT, increased taxes on alcohol, tobacco and other luxury goods, and huge swathes cut from government spending.  Even the hallowed defense budget had three billion Shekels cut from it.  The result of this is that Lapid's popularity has dropped dramatically since he assumed his job as minister of defense.  In mid-April, Lapid was the most popular politician in Israel, topping even Prime Minister Netanyahu.  By the time May rolled around, Lapid found himself the target of anti-government street protests promoting social equality.  His popularity has steadily plummeted in the process.

The job of Israeli finance minister is something of a thankless task.  This is especially true for a finance minister who wishes both to promote economic stability and growth, while also helping the weak and vulnerable.  The difficulty was emphasised by reports that were published recently about key aspects of Israel's economy.  A report published by the Organisation for Economic Cooperation and Development (OECD) has placed Israel first in poverty rate amongst developed nations.  The report said that one in five Israelis live in poverty, and one in three Israeli children live in poverty.  Israel's State Revenue Administration of the ministry of finance published its own report which showed that half of Israeli wage-earners do not earn enough to pay tax.  Given that the tax threshold in Israel is NIS 4,700 (less than US$ 1,300) per month, this is a sad statement about the conditions that people are forced to work in.  When considering that unemployment in Israel is at a relatively low 6.9%, there is not a great deal of hope that the economic situation can improve dramatically by some miraculous boost to the number of people in work.  The Boston Consulting Group published a statistic of its own when it said that Israel has the 10th highest number of millionaires in the world, when measured as a percentage of households.  Fully 3.8% of Israeli households are millionaires.  This simply reinforces the huge gap between rich and poor in this country.

Many point to the huge military burden that Israel has had to carry over the years as the main contributing factor to the current economic challenges.  It is true that with a defense budget of NIS 50 billion (approximately US$ 13.5 billion) and making up around 6% of GDP, Israel does indeed carry a huge defense spending burden.  This is exacerbated by the fact that the ultra-Orthodox and Arab sectors have significantly lower employment than other sectors of society, and earn substantially less than other groups.  This places a heavy burden on the social services for these population groups, who boast larger families and much lower income.  While addressing the earning power of the ultra-Orthodox and the Arabs will not be a magical solution to heal all Israel's economic woes, this must certainly be one of the actions to help the economy back to full health.

There is no easy fix to the Israeli economy that will give an answer to all the questions in the short-term.  The solution is longer-term austerity and responsible fiscal policy.  Even this will not answer all the economic questions that are being asked of our finance minister, but it is important to create an environment for economic growth.  This will give the best possible platform to provide as many possible answers to the numerous questions being asked.

In 65 short years, Israel has built its economy from zero to one which is now in the elite club of the most developed economies in the world in the OECD.  This is nothing short of a miracle, and has been constructed with no help from natural resources, and with maximum exploitation of human capital.  The enormous economic growth and success that Israel has experienced can be attributed in no small way to the hard work and innovation of the average Israeli.  The time has now come to re-examine this approach, and to reinvent it in order to move forward with the new set of realities.  Israel stands on the verge of a natural gas boom which is set to provide noticeable impetus to the economy.  The ultra-Orthodox community once numbered a few tens of thousands, but is now 10% of the population and growing.  The model adopted by the modern Orthodox community, that allows them to live a traditional Jewish life and work to contribute economically, needs to be expanded to the ultra-Orthodox community as well.  Attention needs to be paid to the growing Arab sector to ensure that it makes its fair contribution to the economy.  Weaker people in our society need help, and those who spend their days working to make a living should be entitled to make a living from the work that they do.  The country needs to be able to continue to protect itself, without the defense budget crippling the economy.  These are only a few of the enormous challenges that need urgent addressing.

With all of this in mind, there are some who wonder why Yair Lapid was so eager to take on the role as minister of finance.  Is he really up to this enormous task, and can he make a real difference?  Time will only tell.