Even after their reconciliation talk, Governor of the Bank of Israel Karnit Flug and Minister of Finance Yair Lapid were still sticking to their respective positions on the 2015 budget. In her speech today, Flug repeated, one by one, all her arguments about Lapid's policy, and warned of the economic and social results of this policy.
Flug asserts that Lapid's current policy will cause an undesirable increase in the budget deficit, increase the debt-GDP ratio, and force future governments to increase tax rates and cut welfare spending. This can be interpreted as meaning that the Governor believes that Lapid is sacrificing Israel's socioeconomic future for the sake of the present. Furthermore, Flug is more than hinting that Lapid, and essentially the entire government, is incapable of dealing with the need to set priorities.
In a week when the government decided on a NIS 2 billion across-the-board budget cut, Flug reiterated her warning about the consequences of such a measure. She again reminded the government, especially Lapid and Prime Minister Benjamin Netanyahu, that civilian spending in Israel is the lowest in the OECD, which is affecting welfare and equality in society.
A clear message
The message is therefore the same message, and is clearer this time: tax revenues should be increased, first of all by eliminating exemptions and also by raising tax rates. The attempt to avoid this measure will not only jeopardize financial stability, but will also render the Israeli economy more vulnerable to economic upheaval and have a negative impact on the people's welfare.
It can be assumed that the Governor has expressed these arguments more than once to the Finance Minister without penetrating the stubbornness of someone who thinks that she does not understand the world, and that he knows what to do. If Flug continues to insist on expressing this opinion, it may be because her real target is Netanyahu, so that he will explain to the finance minister in his government what reality consists of. As of now, Netanyahu is giving Lapid full freedom of action, and he himself can identify with the idea of cutting welfare spending and lowering taxes. Flug, however, is warning him about the price he will have to pay for not intervening, and that is a language that Netanyahu understands very well.
How can we know if the message has gotten through? The answer is fairly simple: if the prime minister publically summons Lapid and Flug to a meeting with him, it will be a hint of his willingness to move in the direction of the Bank of Israel's positions. What it actually means is that Netanyahu will make it clear to Lapid that the 0% VAT plan must be "postponed," that he must consider which tax exemptions to eliminate without causing a riot - essentially, some of the exemptions under the Law for the Encouragement of Capital Investment are involved - and how possible it is to close tax loopholes as early as next year.
Flug, however, is not merely demanding that tax revenues be addressed. She is also telling the government that priorities must be set, meaning a decision about where government spending will go. In this matter, the prime minister will find it much harder to go along with Flug. Netanyahu will avoid a quarrel with the Ministry of Defense on the budget it is demanding, and with the Habayit Hayehudi (Jewish Home) party on the amounts it is demanding be invested beyond the Green Line. What remains is a cut in infrastructure and civilian spending, while depositing the political cost of this behavior on the Finance Minister's doorstep.
Published by Globes [online], Israel business news - www.globes-online.com - on September 2, 2014
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