The News Behind The News
March 10, 2001


Israel's No. 1 National Security Interest: More Aid

Israel’s new prime minister, Ariel Sharon, has accepted an invitation to meet with U.S. President George W. Bush on March 20.  They are likely to discuss a broad range of issues, including the promotion of peace and stability in the region.

Certainly they will discuss these issues.  But these topics will take a back seat to Sharon’s much higher priority: getting U.S. approval for the special aid package that former President Clinton promised former Prime Minister Ehud Barak.  Israel’s ambassador indicated that the subject of aid would also be discussed in meetings with Secretary of State Colin Powell.

Before anything, Sharon has made getting more aid the first test of his leadership.

Sharon is also scheduled to address the annual conference of AIPAC (American-Israel Public Affairs Committee) the day before he meets with President Bush.  No doubt aid to Israel will be prominently featured in his remarks and he will ask for their support in dealing with Congress.

In comments during the past few weeks since his election, but before his new government was sworn in, Sharon talked of reducing taxes, privatizing state-owned enterprises, emphasizing the growth of high-tech, and other items in the mantra of every newly-elected prime minister about the importance of private enterprise and markets.

Yet Sharon, as his predecessors before him, begins his term seeking additional free money from the United States.  The deals he has cut with his coalition partners will require more, not less, government spending.  Natan Sharansky, the new housing minister, wants to build additional housing at government expense for Russian immigrants.  Other ministers want more money for their constituents.  Not a single minister has asked for a reduction in his budget.  Sharon has trapped himself in his first important decision.

What might he have done?  The answer may surprise and will perhaps disturb many supporters of Israel, but not come as news to readers of this site.  As Sharon steps off his plane in the U.S. he should announce that Israel will no longer accept U.S. aid, period.  He should announce that his government, instead of seeking aid, will undertake a new economic beginning.  He should say that he will instruct his ministers and cabinet to immediately: Sharon will surely talk these economic reforms.  But he will do little more than talk.  He will concentrate on the one thing Israel politicians do well: Get aid from the United States.

Nor can we expect much from his new finance minister, Silvan Shalom.  He is, after all, only one of 26 ministers.  It’s hard to see him aggressively pushing tax cuts.  Indeed, he, too, appears to have trapped himself in the status quo.

Shalom has decided to keep his predecessor’s director-general Avi Ben-Bassat.  Readers of IASPS publications know that Ben-Bassat is the architect of what we have termed “The Great Israeli Tax Grab of 2000.”  It’s hard to imagine that Ben-Bassat will suddenly see the light and renounce his committee’s efforts of last year to impose a bevy of new taxes, especially on capital and savings.

Equally problematic, Shalom will find it hard to rise above Israel’s obsession with macroeconomic stability, that is, getting the balances right.  This obsession with macroeconomic stability means that Shalom will be obsessed with avoiding any increase in the budget deficit, which will mute any instinct he has to reduce tax rates and tax burdens.  The Bank of Israel will tell him that deficits are inflationary and preclude further reductions in interest rates.  Israel’s economics professors will tell him that budget deficits will increase the trade deficit.  They will warn him that tax cuts will result in shekel devaluation and higher inflation.  Shalom has already said that he “won’t change the size of the budget,” but rather reallocate funds within the budget.  In other words, it’s hard to see how Shalom can reduce the scope and size of government, or the tax burden.

In the past few years, the government of Israel has grown from 18 ministers under Netanyahu to 24 ministers under Barak, to 26 ministers (and 15 deputy ministers) under Sharon.  This would be the equivalent of 116 cabinet secretaries in the U.S. government.  Were Shakespeare alive today, he would no doubt create a new literary form—the comic tragedy.

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