A Problem of Netanyahu’s Own Making

Yair Lapid wasn’t doomed to failure as Israel’s finance minister because of his ignorance of economics. He was doomed to failure because of his arrogance and inability to put the needs of the country ahead of his own political interests.

In an attempt to lower the price of housing, one of his campaign promises, he pushed through a bill to exempt first-time home-buyers from the 18% Value Added Tax. While the plan gained him a few good headlines when it was first announced – a feather in Lapid’s political cap — it earned the scorn of practically every serious economist in the country.

His ministry’s chief economist, Michael Sarel, a former official at the International Monetary Fund who has a doctorate in economics from Harvard, blasted the proposal. In his letter of resignation he wrote that it was “faulty in … almost every possible way and will almost certainly not reduce home prices or ease the problem of a shortage of homes relative to demand.”

In the meantime, the hold-up in the passage of the bill — it is stuck in the Knesset Finance Committee which hasn’t been able to get straight answers from treasury officials as to how much it will cost and how it will succeed in lowering prices — has created uncertainty in the market and brought apartment purchases to a halt, causing inestimable damage to builders (who will have no choice but to raise their prices).

Despite the wall-to-wall opposition, Lapid isn’t giving up on zero-percent VAT because he knows it will play well in the next elections, which may come sooner than expected.

Electoral considerations are also behind his insistence that taxes not be raised to cover the cost of Operation Protective Edge in Gaza. “I will not sit in a government that goes again and places its hand in the pockets of Israeli citizens when there is no real need for it,” he told an interviewer, in a clip that will sure to be played again and again in the next elections.

Lapid’s populism know no bounds. Despite the security threats from near and far, he is claiming that the defense budget doesn’t need a major infusion of cash, contradicting the prime minister and the defense minister. And contradicting the governor of the Bank of Israel, Karnit Flug, he is proposing raising the national deficit cap to 3.5% of GDP.

Lapid is ignoring Flug’s warning that a deficit above 3% of GDP will signal the loss of Israel’s commitment to fiscal responsibility and risk a loss of credibility. He is putting his political need to say he kept his word and didn’t raise taxes ahead of national needs.

Despite all of the above, Lapid is not to blame for the current political and economic impasse. The fault lies exclusively with Prime Minister Binyamin Netanyahu.

It was the height of irresponsibility to entrust Yair Lapid with the national treasury. And while at first the only ones to complain were the chareidim, who knew that Lapid would slash yeshivah budgets and child-allocation payments, today entire segments of the population are crying out in pain over the appointment.

Sami Peretz, writing in Haaretz in an article titled “Seven Reasons Why the Israeli Economy Is Losing Altitude,” blamed first and foremost the country’s lack of economic leadership. “Netanyahu found it convenient to saddle Yair Lapid with the Finance Ministry and let him get into trouble, even at the cost of harming the economy…”

Peretz goes on to call Lapid “a minister who lacks experience in and understanding of economics, [who also] has contempt for the profession known as ‘economist.’”

In the end, compromises will likely be found, despite Netanyahu’s provocative decision Monday night ordering his coalition chairman to withdraw the zero-percent VAT bill.  Not because of the national interest — the country cannot afford elections at this time, less than two years after the last ones — but due to narrow political considerations: The coalition partners are in no shape to face the voters.

Lapid’s 19 seats have dropped by half, according to the latest polls, and the Likud is facing a split from Avigdor Lieberman’s Yisrael Beiteinu party, its partner in the last election, and fierce fighting from within.

Netanyahu, who is serving his third term as prime minister, is no political novice. He knows that the next “coalition crisis” is around the corner and that the way to prevent it is to create a government that is less fractured.

He also knows that he will ultimately be held accountable by the voters for imposing upon them a finance minister like Lapid and saddling them with debt and an economy that is going from growth to stagnation and worse.

He needs to seriously revisit the mistakes he made in forming the coalition last year and determine whether it is possible to create a new, more homogenous government that places national interest above politics and that doesn’t lurch from crisis to crisis.