How Netanyahu Went from Idealism to Pragmatism on Economic Policy..

A nice article on how Benjamin Netanyahu Israel’s PM tried to steer the economy.

In 2009, when he was made the PM few expected his govt to last:

In March 31, 2009, Benjamin Netanyahu asked for and received from Israel’s parliament a vote of confidence in the coalition he had put together following the February 10 general election, thereby becoming his country’s prime minister for the second time. Back then, with the domestic political scene in a flux and the global economy reeling from the worst crisis in 80 years, no one believed that Netanyahu’s coalition — which comprised six parties and held 74 seats in the 120-seat Knesset — would survive more than a couple of years.

After all, no Israeli government since 1988 had lasted the full four-year span of the legally-mandated election cycle. This one seemed particularly fragile, because Netanyahu’s Likud party was not even the largest in the new Knesset, having won only 28 seats to Kadima’s 29. But Netanyahu had outmaneuvered Kadima leader Tsipi Livni in the post-election negotiations, successfully assembled a center-right coalition that included the Labour party and had a seemingly comfortable majority.

Despite the shaky political situation, he was the best man for economic policy:

Despite the low expectations regarding the government’s longevity, both political pundits and the general public were confident about one key issue. They believed Netanyahu was by far the best-qualified Israeli politician to handle the challenge posed by the global economic crisis. The high regard he enjoyed stemmed from his stellar record as finance minister in the period March 2003 to September 2005 when, also against the background of a deep recession and severe crisis – albeit a more localized one – he unleashed a series of structural reforms that set the Israeli economy on a course of rapid and sustained growth.

Sadly for the pundits, almost everything they had predicted and expected in March 2009 has turned out to be wrong. Thirty-two months after being sworn in, Netanyahu’s coalition is still in office. On October 9, in a prime time broadcast, Netanyahu called for elections to be held early next year after a three-month campaign, which suggests they could be held in January or February 2013. According to a report in Bloomberg Businessweek, he cited opposition from his coalition partners to his austerity budget as the reason. for The consensus regarding Netanyahu’s abilities as an economic maestro has also proven to be mistaken. If anything, it is Netanyahu the politician who has been the star of this government, while Netanyahu the daring reformer has disappeared from sight – and Netanyahu the champion of neo-liberal economic policy has abandoned or actually reversed many of his most prized policies.

Very similar was expected from Dr Manmohan Singh. However, he has not managed to hold on either political or economic grounds.

Netanyahu’s main economic agenda was to lower tax rates:

Almost immediately after the government took power, Netanyahu and Steinitz launched an updated and extended version of the tax-reduction program that Netanyahu had legislated in 2004 and that had continued virtually unchanged after he left office in 2005. The thrust of the original program, which was scheduled to run until 2011, was to steadily reduce income taxes on both corporations and individuals. It was now superseded by a new one, which continued the process until 2016. Within this framework, corporate income tax had dropped from 36% in 2003 to 25% in 2010 – and, under the new schedule, was to steadily decline further, eventually reaching 18% in 2016.

The second tax reduction program, passed in July 2009, represented an affirmation of Netanyahu’s belief in the ability of lower direct taxes to spur investment, initiative and growth. This, seemingly, had been proven by Israeli GDP growing at 5% or more from 2004 to 2008, and remaining positive even in the slump year of 2009. However, as Gil Michael Bufman, chief economist for Bank Leumi, one of the country’s two largest banks, notes incisively, the government’s policy “ignored the economic facts of life in Israel, which is a country suffering from a structural fiscal deficit” – a reality that the change in the global economy made painfully apparent. As Bufman explains, “over and above the fragility of state tax revenues whenever the economy weakens, the social and political winds blowing in the wake of the crisis reduced even further the government’s leeway to reduce the budget’s civilian expenditures, which are already low relative to most advanced economies, because of Israel’s high defense burden.” In the post-crisis environment, most developed economies were obliged to raise taxes in order to address burgeoning budget deficits. At home, Bank of Israel Governor Stanley Fischer urged the government to utilize the increase in tax revenues for debt reduction rather than tax cuts.

This led to problems of widening fiscal deficit (calling it a fiscal bomb). Later there were protests over rising real estate prices..

Interesting bit..


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