The Knesset on Monday passed a round of austerity measures aimed at curbing the country’s budget deficit, including a rise in the value added tax on all purchases from 16% to 17% that will come into effect on September 1. This move comes on the heels of the cabinet approving a series of budgetary measures that included raising the income tax and taxes on cigarettes and beer. The plan was touted as an economic safeguard against the country sliding into a recession.
Prime Minister Binyamin Netanyahu defended his economic policy, which aims to raise NIS 14.15 billion next year and reduce the budget deficit by 1.5%. During a recent media blitz, Netanyahu spoke of the growing economic crisis in Europe as dragging down Israel’s export-based economy.
While Netanyahu cites crumbling southern European economies as examples to avoid emulating, he seeks to cure the ailing Israeli economy in much the same manner that Athens has sought to save Greece’s: addressing the debt problems through an anti-growth version of austerity, meaning more taxes and more government intervention in our lives.
It hasn’t worked in Greece and it is bound to fail in Israel since the austerity measures that have been implemented in Europe and are soon to be rolled out in our fair country are based on a false premise – that there is a conflict between growth and government austerity.
In essence, the European model for austerity is one that requires the private sector to pay more taxes and pay for debt it didn’t incur so the governments can stay bloated. Afterall, if a country’s economy isn’t recovering, it must be due to too little government spending, right?
Sheer quackery. How well has austerity worked in Greece? Unemployment has surged to 18.8 percent from 13.3 percent only a year ago; pensions as well as state salaries, jobs and services have been slashed; rates of homelessness, suicide, crime and HIV cases from intravenous drug use are jumping.
Is this what’s in store for Israel? By buying into the myth that the economy somehow grows faster if politicians spend our money than if we do, Jerusalem is taking a big risk on a fiscal austerity scheme that ignores a historical certainty: slashing government spending has proven to be a consistent catalyst for dramatic economic growth.
No one can deny that things aren’t looking good right now for the Israeli economy. A severe recession in Europe will no doubt affect us and slow growth forecasts for the United States will only weaken Israeli exports.
As such, an austerity package is critical. However, Israel needs to redefine what “austerity” means, from an additional tax burden on a struggling, ailing economy to material reductions in the size, scope and cost of government.
Furthermore, Israel’s middle class will continue to bear the economic burden and eventually collapse unless both government and private sector monopolies are broken up.
For while Israel is touted for its economic resilience in the midst of a worldwide slowdown, the start-up nation does not have a true market economy since it lacks the most basic and necessary component of a market economy – free competition.
Netanyahu’s plan to save Israel’s economy is essentially a diversion from the dirty little fact that has hobbled the country for decades: a considerable part of the economy is composed of monopolies and cartels.
And this lack of freedom and competition in Israel is pervasive and all-encompassing: giant conglomerates; large workers’ committees that enjoy benefits; import taxes that prevent imports; automobile market; banking sector; size of government; stifling regulation and bureaucracy; large groups that take full advantage of the state budget and more.
And it doesn’t just feel like things are getting worse: they are. Israel ranks 83rd in the world in terms of economic freedom, according to the Economic Freedom of the World Annual Report. Since 2005 Israel’s ranking has fallen 35 spots.
If Prime Minister Netanyahu truly seeks to save Israel from its own Greek tragedy, he’ll have to show leadership in reducing government spending, reforming of entitlements, reducing the rolls and salaries of government employees and reducing the government footprint in the private sector.
For now, Netanyahu and his government are suffering from collective myopia, with the prime minister choosing to manage rather than lead. For the sake of all Israelis, rich and poor and in between, the prime minister best remember that a country that has low taxation and spending, de-regulated markets and few state owned industries, but also keeps the banks on a tight leash, will clearly outperform its peers who don’t.