Most estimates put the cost of Operation Defensive Shield at around NIS 2-4 billion. This is a large chunk of money for the government to absorb, particularly in times of recession. The 2002 budget passed, a month late, after serious cutbacks were implemented in order to account for the shortfall in revenue caused by the recession. Unemployment is at near-record levels and shows every sign of continuing to get worse. The government deficit is growing, interest rates are being forced upward, and the shekel is taking a prolonged beating on international markets. And today, the Finance Ministry predicted negative growth for the second year in a row, on a level not seen since the establishment of the State.
So what should the government do in order to finance the military operations that are so necessary? According to Finance Minister Silvan Shalom, the answer is to raise taxes. One wonders who the economists are who suggested such a feeble-minded answer. To raise taxes during a harsh recession is a sure recipe for depression, not for economic recovery.
The Israeli nation does need to face the costs of the military operations. Most Israelis would gladly do so, since it has been shown that the military solution is the answer to terrorism. Since Operation Defensive Shield began on March 28, there has been a 75% reduction in deaths due to terrorism and a greater reduction in the number of attacks carried out. The government has actually done something. The military has proven itself and reasserted at least some measure of deterrent force. Israeli citizens value the difference.
But the Israeli population has already paid sufficiently to finance the military operations. In the 19 months since the violence began, the tourism industry has lost more than 80% of its value. More than 200 hotels in Israel have shut down. The hi-tech industry has experienced a near-total meltdown with almost every company in the industry either laying off staff or shutting down completely. Exports have suffered as threats of boycotts have resurfaced in Europe. Palestinian terrorism has been a major factor in the drastically increased unemployment in this country, and the cost to the economy is certainly more than NIS 2 billion.
There is more. The Palestinian Authority owes millions of shekels to Israeli utilities such as the Israel Electric Corporation, the Bezeq telephone company, and the Pelephone cellular phone company, to name but a few. All three of these companies have presented lawsuits in Israeli courts to recover these debts, but there is little the Israeli system can do to assist.
In order to recover these costs, Shalom proposes a 1% surcharge on income taxes, most of which will be borne by the middle class. He proposes a 1% increase in Value Added Tax, which is already among the most repressive in the world. He proposes cutting back on National Insurance Institute payments for unemployment, for child benefits, and for other purposes. He proposes taxing the interest on savings plans and provident funds.
But in an economy already hampered by harsh recession and sky-rocketing unemployment, these proposals (among the others Shalom has proposed) place insurmountable impediments on the road to economic recovery. To begin with, spending power is already very low, and even those still employed have little if any disposable income. Raising income taxes and sales taxes will simply force more people out of the economy and put a greater burden on the already over-taxed welfare system. The proposed cutbacks in NII benefits will make the welfare system less able to handle the increased load, and the proposal to tax savings plans will remove the last source of safe income from many middle and lower class families.
In short, Silvan Shalom is proposing to do to Israel economically what Shimon Peres and Yossi Beilin have tried to do politically. The emergency economic plan unveiled last week is the economic equivalent of Oslo. It will plunge Israel into years of hardship from which only a massive sustained effort will be able to extricate it. Whether any future government will have the willpower and stamina to undertake that effort is an open question.
One thing has not entered into Shalom’s equation: increasing anti-Semitism and hardship for Jewish communities around the world. The past four months have seen a dramatic increase in Jewish emigration from Argentina, and a similar increase can be expected from European countries recently beset by anti-Semitic upsurges such as France, Belgium and Germany. These immigrants will need to be absorbed. But first, they will need to want to come to Israel. Why any immigrant should choose Israel under such self-inflicted economic conditions, especially when they come from economic destruction in places like Argentina is another puzzle no one can answer.
Silvan Shalom must provide a very good reason why Israeli citizens, already suffering economically and socially from the terrorism – if not direct victims of attacks themselves -- need to pay for debts that have been incurred due to Palestinian economic and physical violence. It is indicative of the insanity of his policies that not one single party in the Knesset can promise uniform support for the plan. But none of the thinkers in the Knesset are yet suggesting the most obvious alternatives.
First, the government must cutback its own spending. One of the proposals floated by Shalom was a 5% cutback in the salaries of elected officials. But what about reducing the astronomical salaries paid to appointed officials such as the executive of the Israel Electric Corporation, the heads of the universities, and other patronage appointments where salaries ten times the national average are the norm?
Second, certain of the proposals Shalom outlined last week should be implemented, such as a tax on capital gains.
Third, there is some sentimental support for the proposed cutback in child allowances for those who did not serve in the IDF. But rather than institute a permanent cutback, which will in essence bill Israel’s children for the military operation, the government should institute a one-time sur-tax on adults who have not served in the army. This sur-tax should also apply to those who have refused service in the past 19 months for any reason. In this way, those who have not served will still share the burden of the service, which I think is fair.
Lastly, and perhaps most importantly, the Palestinian Authority should be required to pay all of its debts immediately. There is no hope of collecting these funds from the PA directly, but it would not be unfair to demand the money from the donor countries who have been financing PA larceny and terrorism for the past nine years.
These combined measures will be more than sufficient to finance the operations that have just concluded. The surplus can be used to increase security measures across the country and even to create jobs for those who have become unemployed as a result of the violence.
Until such creative thinking takes hold in the finance ministry, however, opposition to Silvan Shalom’s economic Oslo is as important as opposition to the diplomatic Oslo we all know and hate.
Copyright 2002. All rights reserved. Yehuda Poch is a journalist living in Israel. Reproduction in electronic or print format by permission of the author only.
