The Private Sector Will Drive the Economy
Interview with Finance Minister Avraham Shohat by Tamar Ben-Yosef and
Zeev Klein, "Globes", Aug 27, 1999, pp.58-59
In his first term of office, Avraham Shohat had a budgetary treasure of
NIS 3 billion. This time, in the absence of a miracle, the Finance
Minister and Prime Minister strongly agree on the driving force of the
private sector, rather than on a budget deficit.
The concentrated attacks from the Left on Finance Minister Avraham Shohat
are partially based on the European tradition. On order, at the beginning
of June, a joint communiqu? from British Prime Minister Tony Blair and
German Chancellor Gerhard Schroeder under the double headline "The Third
Way/The New Center" reclarifies the substance of social-democracy.
"Fairness, social justice, equal opportunity, solidarity and
responsibility to others" are the fundamental values of the European
statesmen. But when translated into practical language, the two leaders
claim, "Social justice has become identified with endlessly rising public
expenditures. Schroeder and Blair doubt the ability of the state to
guarantee growth and employment by delicately managing macro-economics,
i.e.: the budget and interest rates. As a result, they offer "supply-side
economics of the Left", including details familiar to anyone who is
following our own 2000 budget. Its key elements are: employment
flexibility; eliminating the concept of "lifelong employment"; changing
the method of social security so as not to harm the motivation to work;
and emphasizing personal responsibility of the individual.
The quoted text gives a broad perspective to Shohat's and Barak's
"budgetary red lines". The European reminder also clarifies the emphasis
given to the private sector to drive the economy. There is no alternative,
since even in the best of circumstances next year, only a few hundred
million Shekels can be allocated from budget resources to infrastructure.
Despite this, and with all the problems inherent therein, Shohat believes
that the Barak government call fulfill its social commitments during its
term of office.
Globes: The widespread criticism is that the 2000 budget does not change
anything. Is there a basis to this, and if so, why?
Shohat: The issue should be compared to the situation that existed when I
became Finance Minister in 1992. Then, within two weeks, it became clear
to me that three billion Shekels (in 1992 prices) were invested in public
housing, mainly in Judea and Samaria. Within two weeks, I froze this
construction. This provided the resources for infrastructure, especially
for R&D and education, in the 1993 budget. The situation is different now.
This is possibly the worst half-year growth in the past 20 years. Against
this background, we must decide what to do with the budget.
Q: Let us sharpen the issue. Are you saying that the situation limits you?
A: Yes, definitely. If I want to carry out a responsible macro-[economic]
policy - both internally and externally - I have to somehow maintain a
reasonable deficit. Therefore, we opted for this number. We could have
added another quarter percent, but we cannot breach the deficit if we want
to maintain the relationship between Israel and the global economy.
Therefore, the Prime Minister and I decided that priority has to given to
try to renew growth through the private sector by creating the necessary
conditions for this, rather than by means of a budget deficit.
This does not mean that Barak's campaign promises have been annulled. I
believe that ultimately we will have accelerated growth during 2000, and
we will have greater resources. Specific commitment will be honored by
then, such as, for example, student loans and the start of free education
for 3-4 year-olds.
The Education Minister has launched an hysterical campaign. I wish to
state, and to reiterate, that the resources at the disposal of the
education system next year are adequate for the school year to be held
with the same level of class hours. The entire campaign is one of
blackmail - unjustifiably. I feel that I am on solid ground when I hear
Yossi Sarid or Shlomo Ben-Ami's moralizing. I was Finance Minister when
the education budget was raised 70%, not only for salaries. I think that
with these credentials, those who are attacking me should examine
themselves.
Assuming a Lowering of Interest Rates
It is important for Shohat to emphasize that all budgetary and related
decisions have been made with the full cooperation of the Prime Minister.
Their working assumption is a lowering of the real interest rate in the
coming months. This is an autonomous decision of the Bank of Israel
Governor based on the non-raising of the inflation target.
Q: The limits you have noted are understood. However, why does it bother
you to raise the budget deficit to 3.5%, which would add another NIS 4
billion?
A: Inflation this year appears to be about 3.2%. We are breaching the
previous deficit law, but we have to demonstrate our ability to reduce the
deficit. Therefore, we decided on 2.5%. It could just as easily have been
2.75%.
Q: The next battle will be in two weeks - on budget cuts. Do you fear that
the government will not approve the plan?
A: I must make this absolutely clear: The plan is not an easy one, but I
believe that the government will pass it. It will pass because the
ministers - each in his own ministry - will see their budgets and
understand that they will have to live with it, and that there is a
national responsibility. In the next fortnight, the budget department
staff and I will meet with each minister over his ministry's budget.
Q: You are not considering that the government will reject budget
categories?
A: I am not coming to the government without the Prime Minister knowing
exactly what I am coming with. We have met for long hours - just the two
of us, as well as in larger groups with Finance Ministry staff. I have not
thrown some kind of bomb.
Q: After the government hurdle, there is the Knesset. Do you think that
your fate will be better than Ya'akov Ne'eman's?
A: I want my fate to be like it was in my first term. I presented four
budgets to the Knesset, and they left it as they entered. But I agree that
the present coalition is difficult and composed of many parties.
Previously, it was a minority government of 44 MKs from the Labor Party
and 12 MKs from Meretz. We found partners from outside the coalition,
there was party discipline, and a dynamic prime minister. Furthermore, we
were helped by quick results: the economy began to grow within a year,
unemployment dropped and social budgets increased.
Q: Is one of the reasons for the restrictive budget deficit the desire to
"live with" the Bank of Israel? If so, how does this square with
Thursday's non-lowering of interest rates?
A: Since the day I was selected for this post, I have said that I will
cooperate with the Bank of Israel. This does not mean that I think that
the high interest rates have had a negative affect [on the economy] in
recent years. But in light of the fact that the Governor, on his own
authority, joined the decision on monetary policy (which is spread over
two years) and determined an inflation target of 3-4% without even
mentioning the striving for an inflation rate comparable to Western
industrial countries, I assumed that we could join hands in setting
monetary and budgetary policies. No deal was made, not on the size of the
deficit, and not regarding lowering interest rates in a specific month.
The Prime Minister's and my assumption was that at the inflation targets,
and the striving for a level of 1-2% annually, there was a good chance
that real interest rates would be lowered.
Q: What were the opening positions of the parties in the negotiations
regarding the inflation target?
A: We thought of an inflation target of 4% for one year, and no more. The
Bank of Israel wanted a target of 2-4% for next year. We accepted a target
of 3-4% for two years, what I consider to be a reasonable compromise.
Following the decision, the Governor gave his full support to the budget
and reforms. We see the things the same. We are working together fine now.
Q: You are not disappointed by Thursday's decision on interest rates?
A: No. This things cannot be judged in terms of a single month. I hope
that in 2000 we will have a situation of stability so that the Governor
can lower the nominal interest rate, and thus, de facto, the real interest
rate. This is what will affect the economy, what is important for us to
resume growth. This is also the Prime Minister's and my working
assumption: a lower real interest rate in 2000 and 2001 than this year's
7.5-8% rate. This is not an agreement with the Governor. It is not an
understanding. There is no deal. But we have our analysis, in which the
above scenario will occur, under normal circumstances.
A Common Credo is Lacking
In Shohat's opinion, he has learned to be less sensitive to the daily
battles as Finance Minister. But in describing his position, he repeatedly
uses the expression, "I believe". Against his personal vision, he admits,
there is no credo common to all the factions comprising "One Israel", and
the absence of a long-term social plan is felt.
Q: There are legitimate claims against the structural reforms. They will
generate growth in the long term, but could increase unemployment in the
short term. Is this the right time? Would it not be better to send a sharp
message regarding the protection of working conditions?
A: The structural reforms will only create jobs. Breaking up refineries,
and diversifying products will only create jobs. Has Israel Chemical fired
employees? Has Bank Hapoalim? If a concern is healthy, the opposite is
true - it will increase its operations. Structural reforms will be done
with the workers' participation. This is written in the government's
decision. We are not expelling workers, nor taking away their bread. But
yes to competition, yes to structural reform, yes to improved consumer
service and lower prices for goods and services. The expected results from
these steps are as if there was a real devaluation.
Q: The sharp criticism heard regarding the budget is certainly in part a
political struggle. But the other part perhaps is derived from the fact
that "One Israel" has no adequate or precise socio-economic declaration of
principles. Has not the time arrived to formulate such a declaration, such
as Blair and Schroeder have done?
A: Our issues are clear. It is true that they have not been written in a
formal document, or as a list of government guidelines. There may be a
place for such an issue, I accept this. It could be done in the framework
of "One Israel" in the Knesset, or in the framework of the Labor Party
Central Committee.
Q: What is you position on socio-economic problems? Ministers are leaving
cabinet meetings saying unpleasant things about the Finance Minister and
his policies. Shlomo Ben-Ami said Thursday, that he wanted to be Finance
Minster.
A: Ben-Ami, Levy and Sarid attacked Treasury officials and the Prime
Minister's policies, of which I am a partner. I want to say something to
each of those attacking the Treasury officials: "Those who vote for this
government are not the Budget Department staff. The responsibility is the
cabinet's and not the Treasury officials. This attempt by a few ministers
to pass the buck is political cowardice and an avoidance of the truth. I
still do not understand what a "technical vote" is. The government
decides, and the ministers must support it, and not claim that they have
an alternative policy.
Q: Doesn't the criticism focusing on the Treasury officials bear witness
to a fundamental lack of balance in the decision-making process? There is
a concentration of power in the hands of the Budget Department officials,
rather than in the government's. Under this system, doesn't the Planning
Authority determine targets? The collision is one of values, and a
professional argument between groups and shouldn't there be someone who
sets the common denominator?
A: I think that the Budget Department is the sole body that lives with the
limits. However, I think that the State of Israel lacks a general level
for national planning. I have a number of proposals on this matter; I do
not want to go into details. The answer is yes, a Planning Authority
should be established, since the Budget Department concentrates mainly on
the daily management of the economy, and not on long-term social planning.
Q: Will there be tax reform and when?
A: We will begin work on this in 2000. I hope that the legislative process
will be in the first half of the year, and the reforms implemented no
later than 1 January, 2001. The reforms in the capital market will be
partially included in them. Implementation will not necessarily be done in
one shot. It may be that fiscal balance will be achieved only later in the
term, but a plan describing the reforms must be decided first.
Q: Where is the light at the end of the tunnel?
A: The growth potential of the Israeli economy is between 4-5% annually.
If we can sustain this rate of growth, it will be a fantastic success - a
drop in unemployment, a drop in the tax burden, an increase in resources
for social services. It will be a great success if in 2000, we achieve 3%
GDP growth. Why only 3%? Because we are starting at a very low rate.
Q: Do you still want to be Finance Minister?
A: Yes. I have learned to be somewhat less sensitive. This is a great
advantage, in addition to the advantage of experience. Furthermore, I am
still at the stage where I like trouble. I hope to complete a full term of
office, and I hope to achieve the things I promised the voters. I believe
in growth. I believe in investment in education. I believe in these
things."