Distinguished Audience,
The events of the past few weeks shed a new light on this Caesarea Forum, and it seems that it would be appropriate to focus our discussion on the issue of "Economy and Governance", or to be more precise: "Economy despite the Problem of Governance."
From the side of the governance, ongoing political turmoil – just as we are experiencing at this time – is especially intricate and complex. As opposed to election periods in which the rules of the game are known, the horizon is clear, and the behavior of the political players is interpreted – openly and legitimately – as a petition to potential voters, the current period is characterized first and foremost by uncertainty. The different players in the political field are calculating their steps and considering the many possible scenarios for the future; the media is meticulously investigating – and rightfully so – every governmental decision, and pondering whether it was brought about by true commitment to a national mission or by personal election-year considerations. The general political weakness is like an invitation to different interest groups, calling on them to take advantage of what may be the final "window of opportunity", in order to apply pressure, to protest, to create a chaotic atmosphere, thus achieving any possible goals before the governmental system enters another election period.
The most obvious example is the behavior of the Knesset recently, and the intensifying stream of private bills that have financial or budgetary implications – bills that are promoted against the will of the government and the coalition.
When the average Knesset's lifespan is cut in half, leading long-term policies and making significant reforms become an almost impossible challenge. In light of the current instability – which has characterized many previous periods of political turmoil – unavoidable questions of governance, legitimacy, and other fundamental issues in any democratic regime have become the center of attention yet again.
In the following address I will attempt to analyze the ramifications of this period of uncertainty regarding the activity of the executive and legislative branches in the realms of politics, society, and economy, taking into account the complex challenges the State of Israel faces.
In the political realm –
Israel has been directing several crucial diplomatic and political processes, the success or failure of which could have consequences of vast importance in the areas of regional stability and the strategic balance of power between Israel and her neighbors.
My opinion on this matter is that we, the government and the individuals that comprise it, must adopt two fundamental rules in our political actions:
First, we must recognize that sometimes haste can lead to disaster. In the matters of war and peace, and in negotiation processes, that is a basic assumption. The challenge we face, in this time of uncertainty, is to find the delicate balance between our duties as a government – leading the country in light of the many complicated challenges it faces, and not allowing it to stagnate and freeze-up; to identify the cases in which waiting and stalling is irresponsible and can lead to missed opportunities; and at the same time we must recognize the cases and decisions that are not yet ripe, which demand high levels of political stability and major support on the part of the Israeli public.
Second, there are certain aspects of the ongoing diplomatic processes – with the Syrians, the Palestinians, the Iranians, and regarding the POWs and MIAs – that it is better not speak of, whereas discussing the matter is not only unhelpful, but may even be harmful and could uncontrollably affect the regional state of affairs in the coming years.
As a rule, we, Israelis, have a tendency to analyze the intentions of our adversaries too naively; to assume that if we only extend a hand of peace – thinking this is an expression of remarkable strength – our enemies will immediately follow our lead. We are quick to make declarations, speak much of our willingness to make painful sacrifices, and go on and on with our obsessive self-persuasion that the price of peace is paid in pain. The reality of the Middle East is abounding with conflicts and an intricate weave of interests. There is always the chance the other side is interested only in the process itself – not necessarily in completing it. We must at least consider these possibilities.
We have in us a type of basic urge to make frequent declarations – militaristic and appeasing – even on the most sensitive issues, instead of adhering to the ancient rule "say little and do much". This situation, in retrospect, regarding the issue of the POWs and MIAs; this is the situation regarding of the Iranian issue and the many references and allusions to that matter; this is the situation regarding the agreement with Hamas, and the diplomatic processes with the Syrians and Palestinians. My opinion, as stated, is that there are times and situations where silence, patience, and endurance are called for.
At this point, with your permission, I will address the socioeconomic realm.
Distinguished audience,
The Israeli economy faces many complex challenges – rates of inflation and fluctuation in the prices of oil and commodities; the strengthening of the Shekel versus foreign currencies, and the alarming depreciation of the dollar; the blows to the stock markets, the real-estate markets, the agricultural market, as well as other export areas; the slowdown in some of the Western economies; the dual structure of the Israeli economy; the rise of new-old economic powers in the East; and above all – the fear of political and geopolitical blows affecting the economic realm – all these issues build up concern over possible negative effects on the Israeli market and increase the possibility of a slowdown in the rate of growth we have become accustomed to over the past few years.
Despite the encouraging achievements of the market in the first quarter of 2008, our working assumption in the treasury is that a slowdown in Israeli economy is imminent; and that the global economic crisis will affect Israeli economy, even if only to a small degree, as a result of the market’s relative advantages – its stability, its strength, and the difference between it and other Western economies.
This is the mindset that has guided us in the steps we have taken for the Israeli market in 2008 and in formulating our plans for 2009. The combination of political uncertainty, geopolitical processes, and financial challenges ahead form a more complicated reality in relation to the budgeting process, the make-up of the budget, and the goals of the financial policy for 2009, which we are in the process of identifying at this time. It takes a gentle combination of economic and national responsibility and political realism – prioritizing goals and fronts and focusing on the most urgent and applicable processes. The economic stability of the past years, despite geopolitical and political turmoil, teaches us that it is possible to overcome this challenge and that the economy can be separated from politics. By the way, those were my considerations when I decided to recall the tax plan as it was submitted, despite my belief that it is imperative for the market, considering the challenges ahead. That is also why I've instructed my office to continue in their efforts to formulate an alternative plan, maybe a minimal one, which will be applicable even in a problematic political setting.
In the background of the financial plan for 2009 is a reality that demands bridging a large build-up of commitments, at a level of 8.8NIS billion – a level that was achieved only after a great effort at minimizing the problem. We are in fact dealing with the accumulated failures of the last Israeli governments in defining responsible and transparent budgetary rules that don't mortgage future budgets completely and irresponsibly.
The automatic pilots dictated by government decisions on the defense budget – the Brodet report; the education budget; and the transportation and infrastructure budgets – are enough to form a strong foundation for the budgetary hole we must fill if we intend to maintain a responsible budgetary policy.
My opinion on this matter is that we need a comprehensive revision of the budgetary decision-making process by the Knesset and the government throughout the fiscal year – a revision that includes extreme restrictions on the ability of the government to make decisions that entail adding to the budget during the fiscal year, especially multi-year decisions.
After 2008 was characterized by a strict adherence to a responsible budgetary policy, reasonable wage agreements in various fields, and the curbing budgetary bursts in government deliberations, 2009 must mark a change in budgetary responsibility for the future – by entering a multi-year plan calling for minimizing the debt and fiscal restraint and by creating a formal system that will restrain the ability of the governments to make additional budgetary commitments at the expense of future budgets.
This is the heart of the deliberations we initiated in the government regarding fiscal goals. The allusion that has developed over the past years that we need to adopt a multi-year budget plan in a variety of fields – education, internal security, health, infrastructure, transportation, and defense – is shattering in front of our eyes, and if we don't bring it to a stop, we will risk uncontrollable budgetary divergence.
In this context, the direction the discussion which developed on the topic of governmental fiscal goals for 2009 has taken is worrying and disturbing. The attempt to focus the discussion on the increase in expenditures in 2009 is an evasion of a true and honest handling of the real problem of defining priorities. It is easy to escape by recommending the addition of a few fractions of a percent to the government's budget and to assume that the pilot’s problem and the necessity of changing core governmental decision on the allocation of budgetary additions to social and economic sectors have been solved. The thought that increased government expenditure will necessarily be channeled to long-term growth-generating sectors – especially in a time of political instability – is problematic in my eyes.
Significant decisions on priority issues mean an understanding that a hastened decrease of government debt in upcoming years will allow:
- A massive release of independent sources that are today reserved for paying off interest fees.
- An expansion of Israel's flexibility, considering the possibility of economic, political, or geopolitical crises.
- A display of fiscal power and credibility, which is the heart of the evaluation of Israeli financial policy in the business community, in the OECD, by the World Bank, and among credit rating companies – despite Israel's unique circumstances.
By the way, the way I see it, the fiscal discipline we have applied also has an element of inflationary stability and restraint, which allows the Band of Israel to implement a monetary policy that takes slowdown trends and growth goals into consideration despite inflationary concerns.
In any event, the Caesarea Forum's research team's recommendation to increase government expenditure by an additional 1% and to increase government debt, while postponing the achievement of a 60% debt-production ratio by five years at least, makes achieving the goals I've mentioned impossible. Moreover, it is very difficult to decrease government debt; it is very easy to go into debt – especially in Israel's geopolitical reality – and I'm afraid unleashing fiscal restraint in the short term will take Israel's economy many years backwards.
A significant decision on prioritization means dealing with the division of the pie and not with its size. Does a debt-policy or a larger government solve the fundamental question that is raised by the enormous investment on the part of the government in Defense? I am not a fan of small governments; I am a fan of effective governments. Nor do I know if the absolute size of the government is optimal – or how to make an effective comparison. But I am convinced that in a reality of huge debt, which ties up vast budgets, and considering high levels of inefficiency in allocation – especially in education, defense, and welfare – this discussion must be postponed for several years.
The insistence on responsible fiscal policy in the past few years, while diverting the fruits of growth to the benefit of the education and welfare systems, is the proof that both goals can be achieved, and there is no need to choose the easy way out – enlarging the government and irresponsibly enslaving the future generations. Within this fiscal framework, and assuming growth will slow down, the government must formulate its economic policy goals for 2009.
I am proud of the renewed definition of the meta-goal we have presented to the government within the framework of the budget deliberations. It was defined as "growing while closing gaps". For the first time, the treasury delivers a message according to which the stocktaking of growth data is not everything, and not only is inequality morally wrong – it is also unhealthy for the economy.
Public discourse which developed recently on the topic of "child stipends" elucidates the fact that the consensus on the goal of closing social gaps holds an ideological disagreement on how to best achieve this goal.
In my eyes, a responsible socioeconomic policy should focus on a real minimizing of poverty, and not on artificial minimizing in the form of allowances and stipends. The emphasis of 2008 should continue in 2009, and focus on the government actively working to raise the rates of workforce participation, on employment of Ultra-Orthodox men and Arab women – while promoting this kind of shift with incentives such as negative income tax, on shifting from allowances to services, on investments in technological education and education in general – while recognizing that it is the main way to ensure continuing growth – and on strengthening the processes of shifting from training to work, even among the hard core of receivers income security allowances.
In the past months we have formulated a comprehensive plan to broaden the national deployment of the "lights for employment" project – the plan is ripe for deliberations and decision and I hope we are able to reach an agreement with the Minister of Industry, Trade and Labor on this matter and speed up the program in 2009. Another plan I have adopted is one that deals with a considerable decrease in the number of foreign workers, which I intend to present to the government in the coming weeks.
I believe that the revolution in the workforce over the past two years can and should continue, despite the expected slowdown and because we may have to deal with the possibility of layoffs. But this can only be on the condition that we don't tamper with it by giveaways which undermine the delicate structure of the market and the system of incentives that took much effort to build in order to get more and more people to find jobs.
Economic policy for 2009 must also deal with education. As Minister of Finance, I am convinced that education, in general, and in Israel particularly, is the main method that ensures ongoing real growth, and that it is imperative for minimizing social gaps in Israeli society. But after investing so much in this area, it is time to move on to a different discussion, which is focused on the products of the system, on its ability to lead the reform it has committed to, on the production levels of the Ministry of Education, and on its budgetary methods. Only if we let the question of additional budgets go, can we consider these fundamental questions, and I fear that our examination will leave us far from satisfied.
Thus, for example, I am in the opinion that a more efficient use of education funds means differential budgeting – in the spirit of the Shoshani Report – so that the large sums of money are channeled while socioeconomic characteristics are taken into consideration and resources are diverted to the periphery. This opinion of mine was formed after I understood the vast inequality in the education system’s current budgeting practices and in per capita expenditure for education according to socioeconomic and geographical parameters. The same discourse must include higher education as well. I don't intend to explain just right now how the Shochat Report transformed from a proposed reform, which I supported completely, into a simple platform for budgetary demands. Also here we have forgotten the questions regarding budgetary method, transparency, incentives, allocation, and the quality of products of such a large system that receives a considerable amount of the national resources. Here too there is danger of being tempted to allocate more and more resources despite the fact that without a serious structural change they won't have the required effect on the higher education system, which is so important to us.
In my eyes, the road to the 2009 budget must run through investment in peripheral areas, in light of our abundance in commitments and the need to maintain a responsible fiscal policy. Only by diverting substantial resources in the areas of education, welfare, employment, infrastructure, transportation, and interior from the center to the periphery, can we reach the policy goals the government has set in the areas of education and welfare without breaching our responsible budgetary framework. Inequality in Israel is clearly a geographical issue as well, and only affirmative action for the periphery can ignite the future growth engines of the market and significantly decrease social gaps, as well as gender ones.
We have formulated a comprehensive plan with measurable goals regarding the periphery. This is a plan which calls for residents of the center of the country to forgo a large portion of the resources that have previously been allocated to them. I will present it to the government if and when I know it will pass in its entirety, despite controversial aspects and the blow to the center.
In 2008, we promoted several structural reforms which the treasury had meant to deal with for quite some time – electricity, the broadcasting authority, military industry, and the Israel Post. Promoting these reforms further in 2009 is imperative due to the crisis that has befallen some of the above bodies, and as an important factor in improving the market, in diverting funds to the business sector, in increasing the competition. and in the process of making public services more efficient – which are all desirable in this period of economic slowdown. Beside these structural reforms, the process of examination and surveying of the Israeli stock market will continue – in the context of the Ariav Committee – in an effort to test the market's potential and the possibility of a comprehensive reform which could create another growth engine in the Israeli market.
Recently there have been voices calling for the formulation of a financial plan, in cooperation with, and agreed upon by, representatives of different sectors of the market. I give my blessing to any initiative that seeks to do good for society and the economy, and to those who are willing to devote themselves to the promotion of complex processes in light of the challenges facing the market. Our financial plan for 2009 touches on different sectors of the market and attempts to provide the solutions to the challenges we face. It deals, among others, with industrialists, the self-employed, unions, local authorities, different financial firms, and other bodies that are active in the market. I believe it should be promoted as a co-operation with all sectors in the market, in light of its complexity and difficulty. I intend to turn to these sectors and hear their opinions as part of the budgetary process and financial planning. Even so, I can't help but comment on those who tend to present the "consensus attitude" as if it is everything when it comes to the implementation of financial policy. At the basis of this point of view is the idea that anything can be promoted in the market through discussion and agreement.
I would be very happy if it were possible to implement a financial plan through discussion – and I hope that will be the case in the series of reforms I mentioned above, which are on my agenda as Minister of Finance. In any case, discussion and cooperation are all good and well as long as they lead to consensus – but life is more complicated than that.
The market stands before difficult challenges. It is in need of strong economic planning, led by the Minister of Finance and leaning on three pillars:
- Budgetary discipline – in order to establish the credibility and strength of Israeli economy.
- Promoting measures that encourage growth – by leading structural reforms that increase competition in the money-energy-communications market, as well as other markets; by leading another initiative for reducing taxes long-term; and by leading other measures – such as the revolution of accessible government – in order to improve services in the public sector.
- Promoting a comprehensive social agenda – aimed at minimizing the gaps in Israeli society, and breaking the market's dual structure – by effective investments in education, continuing the reform in the workforce market, and deploy growth engines in the periphery.
I pondered much over the best way in which to present you with the main points of my economic policy for the year 2009, considering the current governmental reality. My duty as Minister of Finance is to continue to lead a determined economic policy, vis-à-vis the challenges the economy faces, and from this perception, the socioeconomic policy which I presented before you today, and which I intend to present to the government, was formulated.