Israel Hurts Growth by Scrimping in Wrong Places, Lawmaker Says

The Israeli government is hobbling growth by not investing in programs that would narrow income gaps and broaden the workforce, according to parliament finance committee member Erel Margalit.

Short-term budget panaceas such as raising the value-added tax and cutting subsidies to families with children only hurt the economy in the long run by further weakening the country’s needier groups, Margalit, a lawmaker from the opposition Labor Party, said in an interview in Jerusalem.

Scrimping on programs to bring more ultra-Orthodox Jews and Arabs into the workforce similarly backfire by not broadening the labor pool, said Margalit, founder of venture capital firm Jerusalem Venture Partners.

“The biggest criticism of Israel is that it is not making moves that are socially important to integrate more parts of society into the economic boom,” he said. With new revenue from offshore gas discoveries coming in, “this is the time to do it,” he said.

Spending cuts are on the government’s agenda as it grapples with a higher-than-expected budget deficit and prepares to draft a 2015 spending plan. Finance Minister Yair Lapid, who has voiced opposition to raising taxes, said in an interview yesterday that he expects the 2015 deficit to exceed 3 percent. One-time defense outlays, including the development of technology to detect infiltration tunnels dug by militants, are expected to broaden the deficit, he said.

Uneven Expansion

Israel’s economy, while slowing to an estimated 3 percent this year, has outpaced the average for the 34-nation Organization for Economic Cooperation and Development over the past five years, growing more than 4 percent versus 0.7 percent. The expansion has been uneven, though. Income inequality ranks fifth in the OECD, and nearly 21 percent of Israeli households live under the poverty line, a rate that’s highest in the group, according to its measures.

Joblessness and underemployment among Arab citizens and ultra-Orthodox Jews are main contributors to the high poverty rate. With wages not keeping pace with the rising cost of living, the ranks of the working poor have also grown.

Israel wouldn’t be penalized internationally if it raised its deficit for several years with the specific aim of narrowing gaps, Margalit said.

“You can take a bigger loan, but you need a game plan,” he said. “Israel is only interesting if it grows.”

Before it's here, it's on the Bloomberg Terminal.