Big Israeli Government to Get Bigger 

Even as Finance Ministry bureaucrats assemble next year’s spending plans, the Bank of Israel reported that public sector spending will consume 54.4% of the gross domestic product this year.

How big is this?  Bigger than all 20 member countries of the Organization of Economic Cooperation and Development (OECD), which includes Japan, North America, and Western Europe.  Bigger than even Sweden.  Indeed, the average of the 20 OECD members has fallen from 47% a few years ago to about 42% today.

Israel’s unprecedented public sector spending means that interest payments alone will consume more than $7 billion (which is about equal to Israel’s annual receipt of U.S. aid and other unilateral transfers).

The Central Bank reports that all government entities in Israel will increase their spending by 6% this year.  This is a shocking increase given that the economy itself is stagnant.  Private incomes are falling but government spending grows relentlessly.

The same issue of The Jerusalem Post carried another headline story: “Government to Increase Budget Deficit to 2.5% of GDP Next Year.”  This is an increase from a previously scheduled 1.5% of GDP.

What’s the significance of this increase in the planned deficit?  Simply put, the government can spend more money, an extra billion dollars.  This will allow the government to defer scheduled cuts in spending that threatened to put the current political coalition at risk.  (What else is new?)

Where is the extra 1% of GDP to come from?  Why limit the budget deficit to only 2.5% of GDP?  Why not 3.5%?  4%?  4.5%?

Macroeconomic mumbo-jumbo is the specialty of Israeli economists.  They are able to justify any level of taxes, public spending, and budget deficits to which the politicians agree.  They know that printing money is not a real choice, since hyperinflation would quickly follow.  But they believe that additional borrowing stimulates growth.  The only time Israeli economists regard taxes as excessive is when it costs the government $1.01 in administrative costs to collect another $1.00 in taxes, and that level has not yet been reached in their view.  They talk in terms of net tax burdens, not gross tax burdens or high tax rates, and since the government transfers tax money back to select groups of favored constituents (in exchange for votes), the economists see little harm in ever-higher taxes.  (In Israeli parlance, a government that taxed away 100% of GDP but gave it all back to voters in transfer payments would mean that Israelis enjoyed a zero tax burden.  Who would work in this situation when benefits are free and work is unrewarding?)

As we’ve indicated on these pages, time and time again, the Israeli economy is unique.  In the rest of the real world, borrowing and taxing have harmful consequences.  If they didn’t, every country would load up on more and more debt and keep raising taxes.  When countries can’t depend on annual installments of U.S. aid and other gifts (most cannot), the consequences of borrowing and excessive taxation are defaults (e.g, Asia, Turkey, Russia, and Latin America) and stagnation, not to mention a denial of freedom.

Israel’s economy is stagnant with rising unemployment.  Meanwhile, the International Monetary Fund aids and abets Israel’s budgetary irresponsibility by stating that increased deficit spending will allow Israel to stimulate economic activity.  Prime Minister Ariel Sharon wants to spend more money on infrastructure (this is the failed policy of Japan during its last decade of stagnation).  Governor David Klein of the Bank of Israel has given his blessing to a larger deficit so long as the additional funds are spent on infrastructure (which he and his Israeli economist counterparts believe will be well spent and foster growth).

Our question for both gentlemen and their colleagues in the economics departments of Israel’s universities is this: If Israel’s public sector is already the largest among all OECD countries, and if public sector spending stimulates growth, then why doesn’t Israel enjoy the highest growth among all OECD countries?

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