The current government was elected, and Netanyahu took office, pledging major structural reforms in the Israeli economy in order to not only solve the current problems, but prevent them from recurring in as drastic a fashion. And one month after election, Netanyahu presented his messianic plan to save the economy.
The plan calls for deep cuts in all areas of government spending except defense. The deepest cuts, though, are to be made in welfare subsidies to single-parent families, child support payments, education, and unemployment assistance. These cuts, together with massive layoffs in the public sector and wage cuts for those who remain, have predictably led to the threat of a general strike across the country.
The main structural problem in the Israeli economy is the historical tendency to live on credit. Governments live on credit all the time, but the majority of the population in Israel also lives in overdraft, supplying the needs of their families on credit.
In the 1920s, the United States and most of the industrialized world suffered from the same problem. When the house of cards built on massive credit collapsed in October 1929, there was no money upon which to build the new economy. A decade-long depression ensued, which only ended with the advent of war spurring the manufacturing sector and creating new jobs. All of President Roosevelt’s New Deal welfare programs did not succeed in pulling the US out of depression.
The need for credit is based on the inequality between net wages and prices. This inequality is draining the economy of cash, driving more people to live on credit, and draining the reserves of the nation’s banking system.
The difference between the United States of the 1920s and Israel today is that Israel is a country with no indigenous resources upon which to begin an economic recovery. The vast majority of Israel’s trade – including domestic trade – is based on economic relations with other countries. But such relationships depend on the credit – either economic or political – of other countries. And Israel cannot continue to count on such credit – in either area – being available.
The single most necessary structural reform in Israel is a major readjustment of the income tax brackets allowing for a much larger amount of money to be included in the net income of wage earners. The tax structure in Israel currently demands much higher taxes at much lower salaries than in most industrialized states. The result is that the lower and middle income brackets, those that drive consumer demand, have much less money to spend on their needs, and must therefore live on credit.
By raising the amounts necessary for a wage earner to meet the next bracket, and by widening each bracket considerably, more money will be available to drive the economy through demand. This will lead to greater investment – by Israelis – in Israeli ventures, and the development not only of more jobs in manufacturing and supply, but also a higher level of initiative in development of new products and services. And that initiative, the human ingenuity necessary for innovation, is Israel’s most important natural resource.
Most of the elements in Netanyahu’s emergency package are necessary, if only to repair the serious defects Israel’s economy has suffered with until now. Amir Peretz certainly is not interested in the necessity of these reforms. The Histadrut remains unprepared to deal even with its own economic difficulties, as it faces the prospect of laying off 20% of its own employees due to lack of funds. Yet, they would rather bring the state to its knees and perpetuate the current economic sickness rather than take care of their own financial hardships. They would rather continue living off the credit of their own members, and the once-a-decade government bailout, than address real economic needs.
But as necessary as Netanyahu’s program is, it cannot succeed unless it is accompanied by a serious and all-encompassing reform in Israel’s tax system, which would allow for more money to spur demand and investment. Until that happens, Israel will continue living on bad credit, with the threat of total economic depression looming ever larger.
Copyright 2003. All rights reserved. Yehuda Poch is a journalist living in Israel. Reproduction in electronic or print format by permission of the author only.
