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October 6, 2010 1:16 pm

Yuval Steinitz Defies Expectations, Averts Fiscal Crisis in Israel

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“Never jeopardize the future to save the present.”

Noting that its bustling economy is one of Israel’s greatest assets, Alan Solow, Chairman of the Conference of President of Major Jewish Organizations, introduced the innovative economic innovator whose financial developments have been instrumental in keeping Israel on an upward economic trajectory, even in the face of a worldwide financial crisis.  Yuval Steinitz, Israel’s Minister of Finance, discussed the design and administration of the Israeli budget at a New York meeting October 4. He is credited with developing policy that has kept the Israeli economy viable despite the world wide economic meltdown of 2010 9-10.

Avoiding economic crisis in Israel was not simply a happenstance.   In 2008, 18 months ago, Israel’s situation was similar to that of the rest of the world   Figures, said the Minister, were “very gloomy;” a negative growth in the GDP (approximately 3.7 %), reduction in the volume of exports – which comprise about 50% of the annual GDP – by one third, and an unemployment rate feared to reach 15 per cent.

Stenitz was challenged:  should Israel follow the pattern of other Western nations, including the United States, the European Union and Japan, and pour funds into a shallow economy hopping that increased government spending and tax reductions would stimulate economic growth?

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His decision: not in Israel. “In my view, this is problematic.  You are sacrificing the future to save the present. I adopted a different attitude… Never sacrifice the future: sacrificing the future gives a negative ramification in the world.”

Steinitz opted to plan for the future rather than focus on the emergency of the present, seeking to “insure that we have brighter prospects for the future – more important than simply pouring money in to the market.”

Perhaps the most revolutionary action was the adoption of a two year budget.  Noting the work needed to convince both the government and the Bank of Israel, Steinitz says this two year budget is a first, one that “preserves ammunition for recovery, even in the midst of a crisis (indicating that we are not panicking, we are already focusing on the recovery phase.”

“No one ever raised the question (of creating a two year budget).  Once the question is raised, you can see that a one year budget is stupid.”  In business, budget planning to implementation is generally 1:3 or 1:4; government planning generally takes six months, thus the implementation ratio is 1:1.  Invoking a two year time period increases efficiency, bringing the ratio to a more efficient, private sector style 1:4 ratio.  Steinitz noted that the International Monetary Fund (IMF) regarded the Israeli budget as the “most original and successful step taken in the global crisis,” and may suggest that the model be implemented in other countries.

Steinitz has also applied tax policies in Israel that are unique.  In the face of an economic crisis, most countries reduce taxes to reactivate their economies, even though this increased debt foretells future tax increases. In Israel, even in mid crisis, taxes were raised.  “If a choice has to be made between present and future tax reduction, I will choose future tax reductions (which) are better for the futures and for the present. It encourages investment….We have now committed to 7 year plan of tax reduction…We did exactly the opposite: decided to stimulate taxes by raising brighter prospects for the future.”  Investors recognize that taxes will decrease and are encouraged to “invest now!!” The budget for 2011 and 2012 is now in place, with most experts supporting him.

Cautioning that the crisis is not yet over, the Finance Minister notes that “we have to be very careful.  We are part of the world; the slow economy in rest of the developed world may have impact on Israel’s economy.”

The Minister is committed to enhancing the growth engine of Israel, preserving and growing its “edge” in hi-tech, and funding dramatic reform in higher education, especially in research. As a former professor, he has a keen understanding of the importance of academia, anticipating that the proposed six year plan will again place Israel’s institutions of higher education “among the world’s top.”

Asked about the possibility of the Bank of Israel raising interest rates to 2%, a consideration put forward its Governor, Stanley Fischer, Steinitz said “sometime we have disagreements.  There can be legitimate differences in a democratic country.” The minister expressed concern that raising interest rates would bring billions of dollars to Israel, raise the value of the sheckel, but hurt exports.   “You open an immediate gap… (Israel) cannot ignore being part of the global market.”

Of major importance to any discussion of Israel’s economic future is what the policies of Israel will be regarding its newly discovered natural gas reserves.  Investors are questioning the possibility that royalties to be paid may be retroactively raised, and that future royalties significantly increased what are the implication.  Here, the Minister’s response was quite measured.  Noting that the value of the reserve is still unknown, ranging from 50 to several hundred billion dollars, the significance – over the next 30 years – remains to be defined.  The impact on Israel is clearly positive: “It’s good to be independent.”

Further, if as predicted, the reserves are beyond 50 billion, “we will export – “not bad for Israeli influence.”  He continued saying “like any other democratic country, we have a right and a duty to reexamine the finances.”  With current practices based on legislation created in 1952 -which then Prime Minister Ariel Sharon had sought to reform in 2001, Steinmetz noted that the current rate of royalties in Israel “is lowest in the western world.  In most of world, the rate is 35-80 per cent.” while seeking to encourage private sector investment, he stressed that the reserves belong to the land of Israel and the people of Israel.  (Recommendations are currently in committee and will be put forth in about 30 days.) “I am like a lawyer. I have complete loyalty to my client – and I have only one client, the State of Israel.”

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