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Netanyahu May Be Reversing Economic Course
The Media Line

Jerusalem, Israel

Israeli Prime Minister Binyamin Netanyahu, who laid the groundwork a decade ago for Israel's booming economy with a strategy of smaller government, may be reversing course as he faces an onslaught of consumers angry that the growth he spurred hasn't trickled down to them.

Over the weekend, 1000,000 or more protested in cities across Israel against the high cost of housing and other consumer goods, sending tremors across Israeli politics and prompting Netanyahu to undertake a series of rapid-fire measures to satisfy their demands. But far from assuaging them, the protestors returned to their tent cities while municipal employees staged a one-day strike on Monday in support of the protestors.

"I talked to some of them [the protestors] … What I think they are hankering for is to reestablish the big government of the sort that existed until the mid 1980s. I hope that Netanyahu won't succumb to that," Yakir Plessner, who teaches economics at The Hebrew University, told The Media Line. "If he starts to feed the protest beast little morsels, he'll just whet its appetite. That's what he's doing and it's a mistake."

A change is policy could have far-reaching implications for Israel, whose free market reforms and tight budgetary policies have enabled the economy to post eight years of near uninterrupted growth and attract billions of dollars in foreign investment. With Greece and other European countries struggling with huge debts, markets are keeping close tabs on a country's finances.

A Standard & Poor's team that met with Finance Minister Yuval Steinitz last week expressed concern the budget deficit may swell as the government raises spending to respond to protesters' demands, harming the country's credit rating, the daily Ma'ariv reported.

But analysts said Netanyahu seemed to be panicking in the face of protests that began as a small Facebook campaign and quickly ballooned into street demonstrations and tent cities across the country, whose impact has been magnified by extensive media coverage. Reversing the trend of skyrocketing home prices - which is at the top of protesters' demands - would take time, so the prime minister is looking for quick fixes.

"Elections are two years from now but the politicians want to ensure they are reelected and don't want to lose their popularity in the meantime. But the scope of the protest made the government aware that the problems are more acute than it previously thought," Avraham Diskin, a professor of political science at the Hebrew University and Interdisciplinary Center of Herzliya, told The Media Line.

On Sunday, Netanyahu appointed a team of ministers, most of them indentified with the so-called "social" agenda, to meet with protest leaders to devise a way of reducing the "economic burden" on ordinary citizens. He also ordered a scheduled rise in gasoline prices to be rescinded and doubled the home heating grant for senior citizens on welfare.

Officials are weighing a grab-bag of other measures aimed at wining favor with the protestors and the public - tax benefits for working mothers, young couples and people doing reserve duty in the army; reining in the scheduled hikes in electrical rates; and lowering the value-added tax (VAT).

Opposition leader Tzipi Livni urged the government to go a step further and tear up the 2012 budget in favor of a plan that would increase overall spending and devote more resources to social outlays.

Meanwhile, the forces of fiscal discipline and a systematic approach to addressing problems were in retreat. Haim Shani, the director-general of the Finance Minister and its No. 1 civil servant, quit on Sunday over what media reports said was a dispute over the cost of budget handouts promised by Netanyahu to protestors and the scattered approach to addressing issues.

Netanyahu is widely credited with unleashing the forces that created the economic miracle by reducing government spending and taxes, selling off state-owned companies and deregulating industries while he was finance minister from 2003 to 2005. As a result, Israel is fiscally healthier than the U.S. and much of Europe. But that fiscal rectitude came at the cost of slashing welfare spending while exacerbating the already wide gaps between Israel's richest and poorest.

Israel's booming economy and the taxes it collects from it have put the government in an enviable fiscal situation. In the first half of the year, the budget showed a surplus equal to 0.3% of gross domestic product, compared with a deficit of 1.1% the same time in 2010. But the measures Netanyahu has taken or is contemplating could upset that.

Cancelling the rise in gasoline prices will deprive the government of 60 millions shekels ($17 million) in August alone. Each cut in the VAT rate costs NIS 1.8 billion. Tax benefits will cost six billions of shekels annually. If the government were to meet all the protestors' demand, it could cause the budget to swell by 60 billion shekels or 20%, according to a leaked Finance Ministry memo.

On Sunday, Netanyahu insisted that there is on contradiction between his new emphasis on social spending and budgetary discipline.

"We must avoid irresponsible, hasty and populist steps that are liable to cause the country to deteriorate into the situation of certain European countries, which are on the verge of bankruptcy and large-scale unemployment. I don't think that anyone wants Israel to reach such a situation," he told the weekly cabinet meeting on Sunday.

Bank of Israel Governor Stanley Fischer, who is widely credited with ensuring Israel's strong economic performance in the last several years, admitted at a news conference on Monday that he was surprised by the wave of protests. But he warned the government against acting too hastily, especially in the current global economic environment where economic tigers like Ireland rapidly turn into trouble spots.

"These changes happened very quickly," he said. "We need to preserve the framework in which the government operates. We, the government, need to make tough decisions but we can only make them after we have done the groundwork."

In fact, most analysts expressed the view that Netanyahu's government faces no immediate political threat from the protests.

The coalition he depends on for his parliamentary majority has no interest in early elections. Diskin noted that the protestors on Sunday failed to get the backing of Ofer Eini, the powerful head of Israel's Histadrut trade unions federation, marking a major setback for them.

Plessner said he expected the protests lack depth because the economy is thriving and will likely fade out with the end of the summer holidays.

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