Meanwhile… the Israeli Economy

Not many outside the country are taking notice of Israel’s economic commotion. While the world watches fascinated as history is made in Egypt, the Israeli economy is experiencing a moment of indecision that tells us much about the country’s social and political tensions. 

In January, the government raised the price of gasoline to a historic high while reducing the subsidy on bread and allowing a rise in the price of water that is supplied to town dwellers. The public responded with anger, particularly when the media discovered that tax revenues are far above projections. The Likud Knesset faction staged a noisy mutiny and the Opposition had a field day. The New Histadrut labor federation threatened a general strike. 

At first, Finance Minister Yuval Steinitz indicated that the government would not relent, but then Prime Minister Netanyahu stepped in. On Thursday, news broadcasts were about equally divided between coverage of Egypt and the press conference where Netanyahu and Steinitz offered a package of concessions that was summarized in The Marker, Haaretz’ economic magazine: “… raising the minimum wage, canceling the increase to the gasoline excise tax, reducing municipal water rates for most households and making public transportation cheaper.” In order not to break the budget framework, these steps will be financed by an across-the-board spending cut of around 2% and a delay of planned tax cuts on income and VAT. 

The Marker noted that these steps raised questions of two types: 

First, will consumers benefit? Critics argue that the rise in the minimum wage will not necessarily help the poor, but rather middle-class wage-earners, particularly midlevel government employees whose salaries, while calculated based on the minimum wage, often include components that bring their pay up to the average wage and beyond. If they are included in the raise—a point of contention, at this point, between the unions and the government—it will prove much more expensive than projected. Critics also point out that across-the-board cuts are blind to social priorities like education and welfare. They also see evidence of inconsistency and vagueness: the reduction in the price of gasoline does not apply to diesel, and while the price of public transportation was cut on longer routes between “the periphery” and the center of the country, no definition of “periphery” was offered. 

Second, does the government have the capacity to withstand political pressure? The original zigzag between Steinitz’s attempt to stand fast and Netanyahu’s later agreement to concessions gave the appearance of caving to public bullying. As the parties in the coalition seek to position themselves for the next elections, this perception could encourage politicians to turn up the heat again and again when they want concessions. 

One highlight of the controversy was the aggressive approach of the New Histadrut labor federation under its chair, Ofer Eini. While welcoming the PM’s invitation to dialogue, he criticized the government’s concessions as “insufficient” and “unclear.” Almost bankrupt a decade ago, the renamed New Histadrut is a smaller version of the economic behemoth that at one time included about a third of Israel’s adult population and over three-quarters of its wage earners. But its main draw for most workers, the Kupat Holim health insurance system, was undermined by the establishment of a national health insurance plan, and Histadrut had to go into debt to keep afloat. In 2010, however, New Histadrut finished paying off the bulk of the rescue loans, and so is able to flex its muscles once again. Its economic activities now generate a profit of one hundred million shekels a year, and it owns real estate worth billions. Furthermore, now that Labor has left the government, Eini is no longer restrained by coalition commitments. He has an obvious interest in showing greater militancy to gain support for the Labor Party from middle class and poor voters. 

On a deeper level, we see stirrings of conflict over Israel’s economic vision. Once one of the world’s most egalitarian societies, Israel today has a GINI index (which measures income inequality) of over 39, similar to Third World countries like Malawi and Tunisia. To put this in perspective, Israel has a long way to deteriorate before it matches the income inequality of the U.S. (about 45) or South Africa (about 65). Still, for a society that depends on social cohesion to maintain national resiliency, the situation is troubling and the debate over it intense. 

The government argues for a capitalist growth-focused economic policy that will hopefully benefit all in the long term, while others advocate a more social-democratic approach. The aggressive growth-oriented approach of the current government took a psychological blow over the last week, and it remains to be seen whether this will affect the country’s long-term economic policy.

first published at http://bit.ly/1yDFjv0