Kahlon’s budget

In many respects, Kulanu is a political party born of the socioeconomic unrest of the summer of 2011. Moshe Kahlon, who stands at the head of the party, made a name for himself when he was still with the Likud as communication minister under Prime Minister Benjamin Netanyahu. It was Kahlon who finally helped facilitate free market competition among cellphone operators that ended an era of price-gouging and exorbitantly high cellphone bills.

Ever since, Kahlon has positioned himself as “mister economy,” heading a party that succeeded in winning ten Knesset seats in the 2015 elections. As finance minister and now economy minister, he has worked hard to address the many ills of Israel’s dynamic economy. In July, Kahlon unveiled a multi-year economic plan that included steps aimed at improving Israel’s low labor productivity, increasing competition and lowering the cost of living.

Kahlon has also taken important steps to fight housing costs by removing obstacles to new building starts and lowering incentives to invest in residential real estate.

There is much to be lauded about these and other measures being proposed by Kahlon. However, his fiscal budget for 2017-2018 leaves much to be desired.

Kahlon took a number of bold steps which will lead to a larger budget deficit in the coming two years: He got rid of inflation-linked limits on spending increases in favor of nominal increases, he cut taxes, and he increased deficit targets from 2.5 percent of GDP to 2.9%. Unfortunately, he took these steps at a time when economists are expecting a drop in state revenues from taxes as a result of a cooling of the real estate market, a decrease in auto imports and increasing unemployment.

As economists at the Bank of Israel noted, Kahlon should have taken advantage of the recent high level of employment and increased state revenues to do the exact opposite of what he did: maintain fiscal discipline and keep taxes at their present level which is already lower than the OECD average. The present economic growth is being fueled in large part by consumption. This will not continue for long.

And if Kahlon insists on increasing the budget and spending more why is he wasting precious resources on tax breaks? He should be focusing on long-term goals that will contribute to higher labor productivity, which has been steadily on the decline in Israel compared to other countries for the past two decades.

Investing more in education, particularly the sort of occupational training that prepares post high-school Israelis for the modern job market, would be one way to increase productivity. But instead, the finance minister has decided to make a 2% across-the-board cut in all ministry budgets – including the education budget.

The across-the-board cut would also hurt the transportation budget. Poor public transportation and inadequate roads are also a damper on labor productivity. As the Bank of Israel noted, “an examination of expenditure components and proposed steps indicates that the coming budget apparently does not include a marked increase for education and infrastructure – two critical barriers to long-term growth of the economy.”

Kahlon also hopes to offset the tax cuts with revenues from Israel Airports Authority, the Jewish National Fund and the National Lottery and with controversial new taxation on rental income on three or more houses. But it is unclear whether enough revenue will be generated from these sources. The tax bill for three or more houses is unlikely to pass in the Knesset.

Bank of Israel Governor Karnit Flug did have some positive words for Kahlon’s fiscal budget. She praised reforms designed to boost competition in communications and trade, level the playing field in education and change the approach to how self-employed people pay into the social safety net.

But for a politician who presents himself as “mister economy,” Kahlon could have presented a budget that either took advantage of the present high level of state revenues from taxes and low unemployment to maintain fiscal discipline.

If Kahlon insists on increasing the budget deficit he should use the extra money to invest in the future of Israel’s economy, whose success depends on improving productivity. Lowering taxes should wait until the inevitable economic downturn expected in coming years.