Yair Lapid, newly appointed finance minister, and the big winner of Israel’s parliamentary elections in January, took office with a clear agenda in mind: to promote social justice and redistribute wealth. As the popular newcomer, Lapid has been afforded an opportunity to tackle major obstacles to economic development including big corporations and unions, privileged groups, and the ultra-Orthodox Haredim community, amid a ballooning budget deficit estimated at $11 billion.
Lapid’s coalition with right-wing political ally Naftali Bennett afforded him a rare opportunity to break up Benjamin Netanyahu’s long-standing alliance with the ultra-orthodox Haredim and focus on achieving distributive social justice, a promise that got him elected in the first place. Lapid’s electoral success is due in part to his support for social justice demands articulated during the July 2011 protests that rattled the country, when hundreds of Israeli activists set up tents in the middle of Tel Aviv for months to protest against the financial burden the middle class faced due to rising costs of gas, housing, and food. The wave of populist protests in pursuit of equality gained momentum and attracted media attention resulting in public discourse on social disparities.
In response, Netanyahu set up a committee to examine socioeconomic change and make concrete recommendations to the government. The committee identified three key areas that must be addressed to reduce social inequality including limiting the monopolistic power of large corporations, curbing salaries of executives of public companies, and expanding labor participation.
Lapid, who participated in the social justice protests, rose to prominence as a hopeful candidate and as someone who could introduce reforms. Lapid’s charismatic speeches captivated many demonstrators because he highlighted the everyday frustrations that fueled protests in 2011. Secular Israelis who voted for him hoped he would stimulate reform of the ultra orthodox Haredim’s welfare status and limit public benefits collected by strong unions because these groups were identified as contributing to socioeconomic disparities.
After six short weeks in office, Lapid unveiled his biennial draft budget for 2013-14 on May 14. The budget, approved by Israel’s cabinet, placed austerity measures as a way to restore fiscal stability and reduce the national deficit to a manageable level of 3 percent of GDP by 2014 from a projected 4.65 percent deficit this year.
The draft budget allocates NIS 388 billion ($105 billion) in expenditures for 2013 and NIS 408 billion ($111 billion) for 2014 while imposing a lateral reduction of 2 percent in 2013 and 3 percent in 2014. Even with these major reductions, the 2013 budget exceeds the spending ceiling by NIS 7 billion ($2 billion) as a result of prior obligations stemming from agreements the government and the Finance Ministry struck with protesters in 2011.
In fact, when various groups, including doctors, nurses, and temporary contract workers, went on strike last year, the government fulfilled their demands without prioritizing funding or defining where the extra committed funds would come from. The doctors’ agreement alone cost the budget an extra NIS 1 billion a year. The new cuts are mere reductions to previously promised expenditures and an extended line of credit to the government.
In an effort to restore fiscal responsibility and ensure the financial burden is shared equally, Lapid has embarked on breaking up inefficient private and government monopolies by reducing pay hikes and benefits awarded to large firms, taxing the wealthy, and reducing public sector salaries. His proposal to increase the income tax and value-added tax (VAT) while decreasing child allowances may increase government revenue, but in the long run it will stave off growth and hurt the middle and lower classes.
In the past three years, Israel’s growth rate has been decreasing steadily from 5 percent in 2010 to less than 3 percent in 2012. Bank of Israel projections anticipate the growth rate this year will reach 3.8 percent, taking into account natural gas revenues, and 4 percent by 2014. Since the government’s goal is to maintain a fiscally stable budget and generate growth, cutting expenditures and imposing larger cuts will not contribute to growth. In the long run, the budget deficit must be contained to lower the debt burden—almost 75 percent of GDP in 2012—to a more manageable level of 60 percent.
Lapid has an opportunity to challenge the inefficient mechanisms that have been in place for many years. First, he should confront groups with budgetary pensions and exceptional benefits, thus scaling back a large portion of the military budget dedicated to such expenditures. Second, Lapid needs to go after corporations and powerful unions. To date, Lapid has not taken much from corporations and their shareholders despite promises to scale back on tax breaks. On the contrary, he has negotiated a deal with Ofer Eini, chairman of the Histadrut Labor Federation (Israel’s umbrella organization for organized labor) to postpone a 1 percent cut in public sector wages until 2015 in exchange for increased pension contributions and continued education fund exemptions.
Lapid argued that the deal was necessary because it averted a general strike, thus saving the economy NIS 2 billion (about $54 million) in daily losses. Yet, the indefinite postponements of public sector labor union reforms as well as privatization of the ports and power utility, companies like Israel Electric Corporation raise serious concerns about Lapid’s willingness and ability to address government inefficiencies.
There is still a chance that Lapid will target the Haredim’s privileged welfare status, but cutting child allowances will not be enough. Over 50 percent of ultra-Orthodox working age men are not part of the workforce because the state has afforded them subsidies and access to affordable housing thus encouraging more time to devote to religious studies. Lapid’s Yesh Atid party is trying to abolish army exemptions for Haredi men, but targeted change like reducing state subsidies for the independently run religious education system is also a necessary step, which would have an even greater impact on public spending. As part of these efforts, Lapid proposed to change the religious study curriculum to include core subjects so that Haredim acquire marketable skills and integrate into the labor force.
Recent demonstrations by many of Lapid’s supporters are a strong indication that the public is angry and feels betrayed by campaign promises that the middle class “would no longer be the government’s ATM.” Taking to the streets, activists have called for social reforms in light of Lapid’s new budget and the burden it places on middle class households, estimated at NIS 8,000 ($2,208) a year, equivalent to one month’s average salary. So far, localized demonstrations have not catalyzed a large-scale protest movement, as protesters registered minor gains when the government rescinded reforms of medical copayments. Looking ahead, it is likely that more protests will ensue as the combination of cutbacks and taxes begins to take its toll next year.
Lapid’s real test in the coming months will be restructuring labor force participation by bringing in the Haredim and addressing government inefficiencies stemming from strong public labor unions. Lapid’s saving grace may be the projected revenues from natural gas expected to add 0.5 percentage points to growth this year and 1 percent next year, but that would not fix major structural problems or inequality. Ultimately, the proposed austerity measures, although necessary to a degree, are ill-targeted and will hamper growth in the long run as they continue to weaken the middle class.
Svetlana Milbert is assistant director of the Atlantic Council’s Rafik Hariri Center for the Middle East. Photo credit.
