It is now after the Holidays in Israel which means it is time for the annual budget haggling and faux coalition crises that always accompany this annual ritual in Israel. The Budget that Yair Lapid has presented, especially his 0% VAT on housing, is a bad joke. Every economist knows this. Lapid, who has been an economist now for 18 months and been working on his 0% VAT proposal for 4 months is certain he is correct. Economists with hundreds of years of combined experience know he is wrong. Frankly, anyone with common sense knows Lapid is borrowing from our future to keep his Knesset seats with promises of Free Money. He is hoping to pay Tuesday (read in many years) for the hamburgers he gives out today.
Lapid’s budget contains drunken spending increases and a reduction of revenue just as the general economy is slowing down in Israel due to weakness in a key export market, Europe. Europe’s economy is not coming back any time soon which means that Israel’s traditional economy will likely not regain this key export market for years until we finish the blessed transition to South American, Far East, Indian and African markets to make up for the shortfall.
Lapid’s budget is the equivalent of a family deciding to buy a second house, a second car, a new refrigerator and have another child when their salary was reduced by 10% and on spouse’s job is at risk.
The good news is that Prime Minister Netanyahu knows his economics. In the past, I have met with him on economic issues and I am 100% certain that when he looks at this budget he knows it is a problem. He knows that Lapid’s plan to increase Israel’s debt will risk our credit rating which Bibi himself worked so hard to improve. He knows that the 0% VAT will increase housing prices because when you artificially reduce a regulatory cost without increasing supply, prices on the asset will rise. He knows that this budget is irresponsible. Bibi knows that his children and my grandchildren will pay for this recklessness. But he needs to make a very hard decision.
Blocking Lapid’s budget might risk his current “stable” coalition because Lapid has bet his reputation on 0% VAT. As somebody recently pointed out to me, having a head of party (Lapid is the head of Yesh Atid) be the Finance Minister is a bad idea because of the temptation to bribe voters with free money and the reticence to make hard decisions that might impact him at the polls. Therefore, this stability is, in fact, a red herring as the stability of the coalition will undermine the stability of our county’s economy.
However, Bibi cannot and should not worry about the Coalition’s stability. He needs to make the right decision and block Lapid’s budget. He needs to make the hard calls and insist on structural reforms in all government ministries including the Ministry of Defense to reduce the cost structures of these ministries and services and he needs to invest in innovation that will innovate government services and reduce their cost. He must say no to the reckless increase in debt and costs without revenues. Bibi needs to show leadership and take the risk that Lapid walks and plan that either the Haredim will join the government or that he can win another election. If he does not take this risk, he will kick the can down the road and dig a bigger economic hole for our elderly, children and grandchildren. I hope he will do it.