A request for some economic leadership in Israel
The global economic meltdown has created another new buzz phrase: tax avoidance. It is estimated that “around €1 trillion is lost to tax evasion and avoidance every year in the EU.” Israel is always quick to jump on a global trend. For example, Teva, a multinational manufacturer of generic drugs, barely paid any taxes in 2012 and the public is cross.
All that has happened is that politicians have woken up to what many already knew. They had spent a generation – some international laws apparently date back to the days of the League of Nations – creating systems that allow companies to transfer billions overseas and thus pay minimal sums to national treasuries. While this policy boosts employment and generates growth. it is fine in the good times. However, when these same treasuries are short of cash – UK, Israel, Greece, Spain – everyone asks (innocently?) like an idiot “oh, how did that happen?”. Duh!
Increasingly, academics are coming up with ways to tackle the problem, effectively looking to force companies to part with more earnings for the better good without impacting on expansion plans. In parallel, the chronic weakness of politicians seems destined to continue, and no more so than in Israel.
It is now firmly accepted that for all of Israel’s great strides in economic development over the past generation, the wealth remains heavily concentrated in the hands of a few. A simple example of this was revealed a few days ago, when the local branch of Intel announced that it had doubled its exports in 2012 to over US$4 billion, around 20% of all high tech exports. It has also been speculated that the company’s effective tax rate remains under 2%.
Vested interests abound in Israel. Farmers are protected from the import of fruit and vegetables, thus ensuring relatively high prices for the consumer. The Ministry of Defence faces annual calls for cutbacks, but rarely has to cope with a real reduction in its budget. The Electricity Company, a government monopoly, refuses to tackle the issues of over staffing and free electricity for employees. And so the list of structural abnomalies extends.
Back in the summer of 2012, as it became increasingly apparent that a general election was in the offering – effectively, the outgoing Prime Minister was duly reelected in January 2013 – I consistently argued that the country required firm economic leadership. Otherwise, it would lose its ability to return high growth figures, so needed for a dynamic and expanding population.
Since then, the government has been forced to admit that there is a gaping additional hole in its budget – around US$3.5 billion. Growth has slowed to its lowest rate in three years. Private consumption dropped over 2% in the second half of 2012, while exports of goods and services have fallen off by around 6.5%. And, in parallel to all of this, Professor Stanley Fischer, an internationally respected economist and Governor of the Bank of Israel, has announced that he is to leave his position early. Is there anybody in charge?
It is four weeks since the general election. By law, Mr Netanyahu still has an additional four weeks to form his coalition. If these economic and financial pressures are not demanding enough, he has to plan a visit from President Obama in late March. He has to monitor developments in Iran, Syria, Gaza and even in Australia these days. Yet there is no new government in the offering. Minister are forced to carry on ‘as normal’.
Just how long will it be until a proper economic leadership emerges for the benefit of Israel and its economy? More worryingly, what level of damage will been caused by then?