Dark clouds are gathering as the government is contemplating austerity measures to cut the budget in order to meet the demands of “the free market”. Rarely has Benjamin Franklin’s maxim that “no man’s life, liberty or fortune is safe while the legislature is in session” been more appropriate than at this time.  Economist Hay Badra from Dror Israel (www.drorisrael.org.il), an NGO actively involved in many social causes, has taken a closer look at what already happened and what is yet in store for us. With his permission I recount, with some liberties, the first of three parts of his lament addressing the government’s fiscal policy. I suggest you tighten your belt, hold on to your wallet and try not to scream.

Fiscal Policy

The government’s claim that its policies are geared to benefit the Middle Class are patently false. Several days after thousands demonstrated in Rabin Square on May 12th against the government’s policies, a report was published describing the status-quo regarding the number of hospital beds, correct to December 2011. The report shows that during the past six years, the number of hospital beds available has declined across the board, for all patients. The largest decline was in psychiatric wards (42% in the last six years and 50% in the last decade). The number of hospital beds overall declined form 2.09 beds per 1,000 inhabitants in 2005 to 1.88 beds per 1,000 by the end of 2011, a 10% drop. Mind you, OECD average is above 3.5 (!).

On the same day, the Israel Electric Company announced that a further drop in the gas supply from the Yam Thetis field will cause an additional price increase over and above the 9% increase in April, reaching a 25% increase since August 2011. In addition, the Income Tax Authority decided that the best way to lower the deficit is to force private child care facilites authorized by the Ministry of Trade, Industry and Employment to pay VAT. Based on a law passed 20 years ago which has never been enforced, the maximum net salary of child care workers in these facilities will now be limited to 3,537 NIS, down from an original 4,700 NIS.

These steps are just the warm-up for additional austerity measures to hit us in the coming months. The Ministry of Finance (MOF) is toying with the idea of increasing VAT (the most regressive of all taxes hitting the poor disproportionally) from 16% to 17%. Remember, that’s a 6% increase of VAT, not a 1% increase. This off course, in lieu of taking the  2 Billion Shekels gained that way from the well-off by making taxes more progressive, or heaven-forbid, increasing the deficit. The official explanation for this step is an increase in the budget deficit caused by a decrease in goverment revenue. The MOF has already decided to increase the deficit to 29.7 Billion Shekels (3.3% of GDP), short of the expected actual deficit of more than 36 Billion Shekels (4% of GDP). Accordingly, jacking up VAT will still leave a shortfall of 4 Billion Shekels. Part of that will be covered by a 10 Agorot increase in the gasoline tax, an increase in other taxes and by cutting the present state budget. We are talking here about the same kind of policies that are failing miserably in Europe these days. On the background of an economic slowdown, a 0.7% decrease in GDP, as implied by these steps, will only cause more damage.

In fiscal year 2013, austerity measures are only going to get worse. According to the MOF, the 2013 budget will be short of 1-1.5% of GDP, a whopping 9-13.5 Billion Shekels. Increasing VAT by 1 % will increase 2013 tax revenue by 4 Billion Shekels indicating that the government prefers to close 1/3 – 1/4 of the deficit using the most regressive and simplest tool at its disposal. It’s the simplest since there is no need for Knesset approval. In addition, the MOF is looking to implement even tougher measures (totalling 11 Billion Shekels): VAT on fruits and vegetables, a cut in government salaries, an across the board 5% budget cut applied to all government ministries, an erosion of National Insurance (Bituach Leumi) benefits, the freezing of national infrastructure projects in public transportation, a partial freeze of free public education for 3 year olds (as applied by the Arrangement Law during the last decades), a reduction in tax benefits for industry and a cut in the budget of the Chief Scientist of the Ministry of Industry, Trade and Employment.

These decrees are promoted vigourously by Minister of Finance Yuval Steinitz who claims that “whoever acts irresponsibly will incur troubles like Greece and Spain, and we don’t want mass unemployment”. Despite his claims to the contrary there is really no need for these measures. The MOF is lowballing a 3% deficit while there is absolutely no requirement on setting a limit on the deficit in the first place. As opposed to member states of the European Union which are bound to a 3% deficit limit by the Maastrich Treaty and fiscal amendments, Israel is under no such obligation.

On this background, Bank of Israel Governor Stanley Fisher’s support for these measures is even more peculiar. They are in total contradiction to Fisher’s claims last month when he confirmed that “counter-cyclical fiscal policies work”. He is now in favor of clear and brutal pro-cyclical steps.

For some strange reason nobody is suggesting the straight forward approach, a larger increase in the budget deficit and direct, more progressive taxation. In addition to the ever more vicious attack on our income and our benefits as citizens, the government doesn’t permit us to invest our pension money in designated bonds, the most conservative and safest of investments, by refusing to issue them. Rather it prefers that our pension deposits serve to finance haircuts of the leveraged tycoons of Israel.

Adding insult to injury, “The Marker” is presently running a scare campaign calling for an increase (!) in taxes on the Middle Class. This  based on the premise that Israel has to attract the money of the well to do and compete with other countries for their favor. Ergo, the rich have to be pampered with low taxes, paid for by you know who. Who are these well off people so that Israel should vie for their favors ? Are they financial multinationals trying to park speculative money which can disappear just as quickly as it ended up here in the first place ? Or are we talking about rich Israelis who can only do business here since this is where their clients are ? Either way, the MOF can scoop up 6 Billion Shekels just by stopping the tax discrimination against labor in favor of capital and creating a real income tax and not one on salaries.

On the background of the orchestrated campaign run by the MOF, “The Marker” and the Bank of Israel and in the total absence of a voice of economic reason, there is a real need for the protest movement to reengage. This time around the movement should offer a basket of policy tools which can provide a solution to present day economic problems while addressing the real needs of Israel’s citizens.

The government of Israel continues to say one thing and do the exact opposite. While repeatedly claiming to support the Middle Class it continues to pursue policies that reduce the number of hospital beds, increase the price of electricity and jack up indirect taxes.

I venture to guess that this summer will be hot, in more ways than one.