Israel's State Coffers Run on Empty

Low productivity and high birth rates within the ultra-Orthodox sector are not just hindering Israel's economic growth, they're emptying the state's coffers.

Topics covered

ultra-orthodox, knesset, israeli economy, israel, economic, budget

Jun 19, 2013

Before the 2013 Israeli Knesset election, Yair Lapid, head of the Yesh Atid party, asked, Where's the money? Ever since his March 2013 appointment as minister of finance, he has been trying to find it, but to no avail. There's simply no money left in the state coffers, as demonstrated by the cabinet-approved draft budget.

If you look for the money in the short term, you may find some crumbs here and there — possibly even some graves to tax, as previously proposed by Lapid. However, at the end of the day, there is no money to be found because the Israeli economy is not growing, despite the politicians' insistence otherwise. They say that the economy is growing annually by 3%, but this growth rate hardly reflects the true picture.

If you take Israel's economic growth, which is based on the increase in the gross domestic product (GDP) per capita, and subtract from it the country's 2% annual population increase, then you will find that, at best, the Israeli economy is growing by a mere 1% annually.

The Israeli economy's most serious problem is low productivity. Though some of us work long hours, when all is said and done, we are not efficient enough. Why? According to certain studies, employee job permanence undermines efficiency. Other studies point the finger at the “typical Mediterranean worker" who is said to lack an efficient work ethic. Let's be honest — who does not know at least one co-worker whose dismissal would have little effect on output levels? I suggest that rather than relying on the notorious tax evasion “informer” mechanism, the finance ministry set up an apparatus that would allow employees to propose ideas for streamlining work procedures.

The second burden on the Israeli economy is the high birth rate. While Israel's population growth currently stands at 2% annually, the population growth rate in the ultra-Orthodox community is around 7%. The outcome of this rapid population growth is that we give birth to more children than we can support. In the past, the average expenditure per child was rather small. On a poor continent such as Africa children generate income, however, in the Western world considerable sums of money are invested in raising a child. Thus, a substantial part of the government budget has to be allocated to that end. If we wish to ensure rapid economic growth, then this requires a high capital growth rate. The annual population growth of 7% in the ultra-Orthodox community is unsustainable.

If you're wondering how these issues are related to the draft budget — well, it is quite simple. If you review the budget, you will notice separate chapters dedicated to the regular budget and others dealing with the development budget. If you are interested in budget allocation by ministry, this is also explicitly outlined. Yet, if you are looking for the governmental allocation for each sector, you will not find it. Let me present here some preliminary estimates of budget allocation by sector, with the hope that the Ministry of Finance will follow suit and make the relevant data public.

Given total government expenditures of 390 billion shekels ($106.5 billion), and taking into consideration government spending on security, transportation and infrastructure, it turns out that the allocation to the ultra-Orthodox sector totals some 40 to 80 billion shekels ($11 to $22 billion). At the same time, the receipts collected from the ultra-Orthodox sector, including VAT and income tax, may be put at 15 billion shekels ($4 billion). It may be concluded that the net allocations to this sector top 45 billion shekels ($12.3 billion). Although this is a rather rough estimate, it is true to reality.

It is surprising then that the Ministry of Finance keeps this data under wraps while publicizing the 1.5 billion shekels ($400 million) directly funneled to the rabbinical colleges. If you're wondering where the money is, the answer may be: It is being expended on a population that is not participating in the production chain.

What about the workers organized in labor unions? Are they, too, getting more than they contribute? Of course not. The issue of the labor unions has nothing to do with the state budget. Rather, it concerns the question of equal opportunity. The relatively high wages enjoyed by organized workers are outrageous. The income disparity between two workers doing the same job is certainly not fair. As noted, the issue of organized workers and unequal wages does not concern the state budget. All the same, it is an inequitable situation with which the Ministry of Finance should deal.

The fact that the opportunity for real change has been missed is most disappointing, all the more so since the finance minister has been given a rare public mandate to make a difference. The minister of finance should not have raised the income tax — he should cut expenditures that do not contribute to economic growth.

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More from  Elise Brezis