Plan To Pay War Bills Exposes Israeli Cabinet's Fiscal Fissures

Now that the war has ended, the next battle is over how to pay the bills.

“The budget I am presenting today is not the one I intended to present… before the war,” said Finance Minister Abraham Hirchson, sounding remarkably tired as he described his proposal for next year’s annual budget to the media on Tuesday, September 5. “The war has imposed new priorities upon us.”

Hirchson’s plan allocated more than $1 billion to replenish the army’s depleted supplies and rebuild the missile-shattered towns of the Galilee. It postponed scheduled increases in the minimum wage and in government stipends that primarily help a growing underclass. It rejected tax increases to pay for the war.

Actually, this wasn’t the budget that the hapless Hirchson initially had intended to announce at his press conference, which was originally scheduled for the previous day. According to media leaks, his budget was to include a sharp rise in university tuition, significant cuts in government stipends and reduced help to recently discharged soldiers. Even an allocation for protecting public buses — used primarily by poorer Israelis — from terror attacks was supposed to go.

But his plans changed. The fury from Ehud Olmert’s coalition partners, who were all committed to a shift in economic priorities, was so intense that the prime minister told Hirchson to revise the massive package before presenting it. He was apparently up late doing so. The most controversial moves, such as the tuition increase, were erased. Others, such as the cut in stipends, were toned down.

Not that Hirchson’s softened proposal will stabilize Olmert’s shaky ruling coalition. On one hand, the prime minister’s own Kadima party remains fiscally conservative, despite efforts to sound more compassionate than the Likud, from which it split off last year. On the other hand, Amir Peretz, the ex-union chief who heads Labor, has tried to renew his party’s nearly forgotten social-democratic past, and has made a higher minimum wage his primary coalition demand. Olmert made Peretz defense minister last spring precisely in order to put the Finance Ministry safely in the hands of Kadima’s Hirchson.

Before the war, it seemed Olmert could plaster over the differences. Now the fissures are in the open. A source close to Peretz, inexplicably insisting on speaking off the record, said this week that “Amir will oppose any cutback in old-age and children’s stipends” and would reject any delay in raising the minimum wage. Some political junkies even speculated that the minimum-wage delay was a gambit to push Labor and Peretz — unpopular for his clumsy handling of the war — out of the coalition.

But Hirchson’s proposal also brought threats to vote against the budget from the other coalition partners, both of which have strongly populist economic platforms: the ultra-Orthodox Shas, whose voter base is mostly poor and working-class Sephardim, and the Pensioners Party.

In fact, the costs of war are only exacerbating a longstanding clash over Israel’s economic direction. Olmert’s coalition uncomfortably straddles the political debate kindled by rising inequality and years of conservative economic policies. The government’s official annual poverty report, issued just last week by the National Insurance Institute, showed that despite strong economic growth, the ranks of the poor grew yet again last year, reaching more than 1.6 million Israelis, a quarter of the population. The number of children below the poverty line rose from 23% in 1998 to 35% in 2005, reportedly the highest proportion in the West.

And yet despite the cacophony, some key economic issues have received little or no mention. One is a gradual, multiyear reduction in income taxes that mainly benefits better-off Israelis. Another is the ongoing spending on settlement in the West Bank.

For many economists, the important question is whether “a further reduction in taxes is needed for the economy to keep growing,” in the words of Ben-Gurion University economist Avia Spivak. He himself rejects that thesis. The total tax burden in Israel is less than 37% of the GDP, a level that puts it around the median level for developed countries, said Spivak, who recently stepped down as deputy governor of Israel’s central bank. To create growth, he argued, it’s more important to invest in education and infrastructure, such as the rail system. (Hirchson’s budget would scale back investment in rail.)

Under the aegis of the Van Leer Institute, a Jerusalem think tank, Spivak and fellow Ben-Gurion University economist Moshe Justman wrote an alternative proposal for paying for the war. Their figures show that the government could cover the costs of the war, increase both defense and civilian investment, and reduce the national debt — all that simply by freezing tax cuts until 2009. The claim that tax cuts bring growth that “trickles down” to the poor is “not an argument with clear proof behind it,” Justman said.

A leading economic voice in the Knesset agreed. “I have no problem with stopping… this decline in taxes, which mostly goes to the rich,” said Avishai Braverman, a former World Bank economist who stepped down as president of Ben-Gurion University last spring to enter politics. “The weak are paying for the war.”

Predictably, one subject that has largely escaped attention in the economic debate is spending on West Bank settlement. In part, that’s because it is virtually invisible, hidden in countless budget lines but not listed by itself.

This week, for instance, the Housing Ministry announced that it was accepting bids on land to build 690 new apartments in the settlements of Beitar Ilit and Ma’aleh Adumim, both large suburbs of Jerusalem. A ministry spokesman confirmed that in such government-initiated projects in settlements, the state pays half the cost of infrastructure, reducing the purchase price. The number of such projects has dropped in recent years, the spokesman said. But he could give no figure for the outlay in the territories, since it is included in spending on “national priority areas” on both sides of the Green Line, the pre-1967 border. The Negev and Galilee are the main priority areas within Israel proper.

Similarly, a Finance Ministry official said that the government outlay on larger subsidized mortgages for homebuyers in some settlements does not appear separately in the budget, but rather is included in a general figure for aid to “national priority” areas.

The last detailed analysis of settlement spending was carried out in 2002 by Dror Tzaban, a former Finance Ministry official, acting on behalf of the Peace Now movement. Tzaban found that in the previous year the government had spent $440 million in civilian outlays on settlers, above and beyond expenditures on the same number of citizens living within the Green Line. That worked out to $2,000 per settler per year.

Some of the outlays — such as tax breaks for settlement residents and outright grants to homebuyers — were eliminated in 2003 in a drastic round of national belt-tightening. Ironically, the man behind those cuts was then-finance minister Benjamin Netanyahu, known as a settlement advocate. In that case, fiscal conservatism trumped hawkish views on territory.

Yet Tzaban also stressed at the time that his number was only a fraction of a larger and unknown total, since he was unable to separate out settlement costs in major parts of the budget. Most importantly, the Defense Ministry bore significant costs for settlement; however, he said, “the defense budget is a black box,” its breakdown classified.

That comment has additional significance today, when the army is demanding a major boost in spending to prepare for the next war and pay for the previous one. As the debate over the war segues into the fight over the budget, the Israeli public lacks critical information.

That doesn’t mean that reaching agreement on the budget will be easy. The first hurdle is a Cabinet vote planned for next week. Olmert will need to sway his coalition partners, and he and Hirchson are likely to spend more late nights negotiating. It’s even possible that they will put off the tax cuts.

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Plan To Pay War Bills Exposes Israeli Cabinet's Fiscal Fissures

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