Deficit Tests Yair Lapid

New finance minister faces tough decisions in balancing Israel’s budget.

04/17/13
Israel Correspondent
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JERUSALEM – No one in Israel doubts that Yair Lapid, Israel’s new minister of finance, will have to make tough decisions in order to lower the country’s almost $11 billion budget deficit.

And that is despite the fact that throughout his campaign, Lapid promised to make life easier, not harder, on the struggling middle class. 

While neither Lapid nor Prime Minister Benjamin Netanyahu has released any figures, Calculist, a local business publication, reported there will be billions of shekels in cuts to defense, child allowance stipends, infrastructure and public-sector spending.

Lapid is also committed to getting more haredim into the army and workforce, a step that would ease both the financial and military burdens shouldered by non-haredi Israelis in the long term, but cost a bundle in training and work incentives in the short term.

There’s also talk of raising the 17 percent Value Added Tax to 17.5 percent, even on VAT-free fruits and vegetables; raising taxes on luxury items and limiting tax exemptions for big corporations. Income tax is also expected to rise a bit. 

“An economy can’t be changed in a day and not in three weeks,” Lapid, who began his job less than a month ago, recently wrote on his Facebook page. “We need to act responsibly so as not to turn into Greece or Spain,” countries in free-fall. 

Lapid is already being criticized by political rivals who say he is a hypocrite, and by analysts who cite the former journalist’s total lack of financial training or leadership.

“The finance minister … said that the middle class will not be the public ATM and promised new policies,” Labor MK Shelly Yachimovich, who heads the opposition in the Knesset, said Saturday. “Two minutes after he was appointed to his job he introduces [Prime Minister Benjamin] Netanyahu’s exact plan and plans harsh cuts.”

Israeli media insist that Lapid is already on the outs with Bank of Israel Governor Stanley Fischer, the financial genius credited with keeping Israel’s economy in the black despite Palestinian rocket attacks and a worldwide recession. Israelis were already feeling jittery over Fischer’s decision to move back to the United States later this year, cutting short his second term in office to live closer to his family.

Fischer is unhappy with Lapid’s recommendation, already submitted to Netanyahu, to raise the current deficit ceiling from 3 percent of Israel’s GDP to 4.2 percent for the remainder of 2013 and to 3.75 percent the following year.

According to Yisrael Hayom, the move would “reduce the projected budget cuts from $8.26 billion to $4.68 billion.”

Fischer reportedly believes that raising the debt ceiling will imperil Israel’s excellent international financial ratings.

Sami Peretz, editor of The Marker, the economic section of Haaretz, believes that Lapid, a charismatic former talk-show host/journalist who likes to be in the media spotlight, is in for a rude awakening.

“Lapid needs to create a program and budget in which the principal question is: ‘From whom will I take and to whom I will give?’”

That, Perez writes, “will be no easy challenge for someone who needs the public’s love, something that even a direct appeal via Facebook can’t finesse.”   

Ben-Zion Zilberfarb, a professor of economics at Bar-Ilan University and a former Finance Ministry director general, said Netanyahu’s decision to give the finance ministry to Lapid, who has no training in finance, isn’t unusual in Israel, where political considerations often trump expertise.

“In Israel the prime minister has to form a coalition, which is made up of parties. Each party wants a cabinet seat and since the finance ministry is one of the most powerful seats, it’s not surprising that the head of a leading party would want this post for himself.” 

Zilberfarb thinks Lapid “took a big but calculated risk” by accepting the ministry position.   

“He believes the 2013-2014 budget will be a painful one but that things will improve as a result and will enable him to alleviate some of the burden” on the taxpayers who voted his Yesh Atid party into office.

If Lapid’s reforms are painful but ultimately effective, “he will be in a good position in three or four years, in time for the next election and serve as a stepping stone” to the premiership.

But the very cuts that could balance the budget “will not make him popular among his colleagues in the cabinet,” Zilberfarb emphasized. And rolling back child allowances “will hurt poor sectors of society.

“Any finance minister would do more or less the same things, but if for some reason the government doesn’t last” through its four-year term “he’ll go to the next elections as someone both unproven and unpopular,” Zilberfarb said. 

While the notion that the finance minister may raise VAT and lower child credits is already raising the hackles of many ordinary citizens and social activists, few Israelis outside the business sector object to Lapid’s intention to decrease the tax breaks enjoyed by some big corporations.

“There’s a lot of public pressure to do something about big corporations that pay lower taxes than other companies,” Zilberfarb said. “Those companies will still have tax benefits, but they’ll pay more than they pay today.”

That worries Jonathan Medved, the CEO of OurCrowd, a venture-capital crowd-funding platform.

The government, Medved said, “must be careful not to increase regulation and to continue to make Israel a place open for business. Anything else is populist rhetoric.”

Medved insisted that raising taxes on the high-tech sector will in fact hurt Israel’s economy. 

“The high-tech sector, especially the country’s 300 multinationals, creates jobs. For every job at NDS” — a high-tech company that employs 1,500 Israelis — “four or five other jobs are created in insurance, food service, travel agencies, construction, corporate training, PR.”

Ticking off multinational investments, Medved said that Cisco has bought about a dozen Israeli companies, Microsoft seven.

“We want to continue the situation in which people are encouraged to invest in Israel. Otherwise,” Medved warned, “they’ll go elsewhere.”
 

editor@jewishweek.org

Last Update:

04/17/2013 - 12:15

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