The Day After” ProjectAn Israeli “New Deal” for Rehabilitating the Government’s Responsibility towards Its Citizens

Yoni Ben Bassat, Eyal Bar Chaim, Boaz Gur, Shai Weinblum, Dana Vaknin Ganel, Ido Lan
1 במרץ 2024
זמן קריאה 8 דקות

Yoni Ben Bassat, Eyal Bar Chaim, Boaz Gur, Shai Weinblum, Dana Vaknin Ganel, Ido Lan

Chief Editor: Amit Ben-Tzur

Hebrew editing: Daphna Lev

English translation: Dr. Carly Golodets

Graphic design: Adi Ramot

March 2024

“The Day After” project is an initiative of Arlozorov Forum, in response to the revealed weaknesses of the government and civil services during the October 7 war. Within the framework of this project, we have published a series of papers in different fields, which describe the main problems facing the civil services and propose possible solutions. For example, in the field of healthcare, private health insurance is eroding the universal public healthcare system, impacting equality of healthcare and costing us more and more money; in the field of education, there is an acute lack of early childcare educational frameworks, enormous disparities among populations, and children’s achievements are low compared to other countries; in the field of welfare, understaffing has led to a tremendous file overload on the social workers and inequality between strong and weak municipalities; and in the labor market, vocational training has been almost completely neglected, affecting labor productivity and economic growth.

Nevertheless, this project is not intended only to describe the scope of the crisis, but rather, it is first and foremost an optimistic project. The crisis we experienced is an opportunity to change direction: from neglecting and reducing to rehabilitating and rebuilding the civil services. The aim of this booklet is to propose a suitable alternative for expanding the budget framework and rehabilitating the civil safety net, while maintaining responsible fiscal policy.

Abstract

Introduction

During the last 40 years, particularly since 2003, government responsibility for the citizens of Israel has been consistently reduced. This reduced responsibility is expressed by attrition in the face of needs, continued under-budgeting of government expenditure in civil fields, and implementation of significant privatization processes. The reduction of responsibility has taken place in all fields of public services: healthcare, education, welfare and more. This reduced responsibility has negatively impacted the quality and availability of public services, increased disparities in the accessibility of these services and negatively impacted the quality of life of all.

Macroeconomic overview

There is a huge disparity in civil expenditure between Israel and the OECD countries, and between Israel and the comparison countries. As of 2022, the disparity between Israel and the OECD average stands at 171 billion ILS. With respect to the comparison countries, the disparity increases to 284 billion ILS. These huge disparities are the consequence of a policy initiated in 2003, since prior to this policy Israel was very close to the OECD average.

The healthcare system

The Israeli healthcare system presents impressive achievements in preventing mortality and improving life expectancy; however, studies attribute these achievements to previous investment. Today, the public system suffers from three main problems: a budgeting deficit estimated at approximately 20–40 billion ILS per year; severe disparities in labor, including doctors and nurses; and an extraordinarily high private expenditure burden. All of these endanger the ability of the system to maintain its good performance in the coming years.

Mental healthcare

In the last three decades the public mental healthcare system has undergone three reforms, the last of which transferred most of the responsibility for mental healthcare services from the government to the health maintenance organizations. Under-budgeting and understaffing, alongside slow wage growth with respect to the private sector, have led to a severe labor shortage and difficulty in providing adequate therapeutic solutions during both routine times and emergencies. Today the mental healthcare system suffers from three main problems: under-budgeting and understaffing of therapists; difficulty filling existing positions; and a lack of budget stability for resilience centers.

Education system

The Israeli education system is universal, in other words, it serves all children in Israel by law. Consequently, it has one of the largest budgets of all the public systems. Nevertheless, despite the significant budget supplement it received over the last decade, it still suffers from severe under-budgeting, expressed by low public expenditure per student and a lack of early childcare educational frameworks, and more significantly, high inequality of funding and outcomes. The implications of under-budgeting are expressed most clearly by the children’s achievements in comparison to the achievements of children in the OECD countries.

Ministry of Construction and Housing

From a social perspective, the Ministry of Construction and Housing has two main roles: increasing the supply of houses in Israel to create conditions that enable provision of housing at a reasonable price for the entire population and supporting weak population sectors that cannot obtain housing on the free market. To achieve the first aim the Ministry of Construction and Housing plans, develops and markets land for construction. The ministry tries to achieve the second aim through public housing, rental subsidies and mortgages subsidies. Examination of the housing market in Israel shows that these aims are far from reach.

The labor market

Under-budgeting of the labor market in Israel is expressed through very low expenditure, compared to other developed countries, on active policy tools aimed at improving human capital and productivity, including vocational training to provide skilled labor according to market needs. As a result, vocational training is limited in scope and does not provide a solution for the lack of skilled labor, which is also expressed by relatively low productivity in Israel. In parallel, the unemployment benefits system in Israel, which aims to maintain the ability of workers to support themselves after being fired from their jobs until they find a high-quality worthwhile job, is limited and tough compared to analogous systems in other countries.

The welfare system

In recent decades, the welfare services in Israel have suffered from a process of reduction and privatization. Many activities that were operated by the government were transferred to private operations, and sectors that remained under the responsibility of government ministries and municipalities underwent significant budget cuts. Today, we can point to three main problems in the welfare system in Israel: under-budgeting of the welfare system; difficulty filling existing positions, leading to understaffing and increased loads on therapists; and inequality between strong and weak municipalities.

Local government

Israel is characterized by inequality among municipalities, expressed through significant socioeconomic disparities. Due to the public services, such as education and welfare, which the municipalities are responsible for providing, this inequality affects inequality in Israel in general. Moreover, there is strong centralization of authority of the central government compared to the local government.

The disparities among the municipalities stem from direct under-budgeting by the government of balance grants; under-budgeting of the public services (“allocated” budget), necessitating additional funding from the local government even if it lacks funding sources; and disparities in municipal revenue. Furthermore, the absence of a government level with statutory authority between the central and local governments creates inefficiency in the conduct of the municipalities with the central government, increasing the scope of inequality among the municipalities.

Funding alternatives for increasing civil expenditure

The civil services in Israel must and can be rehabilitated, but this requires a significant increase in government expenditure. In this paper we present different policy alternatives for funding reinvestment in civil services in Israel, by implementing the Bank of Israel investment plan for closing the productivity disparity between Israel and the OECD. The alternatives were examined using a simple macroeconomic model that examines the effect of different funding mixes on the main economic variables.

The different alternatives examine different scenarios of increasing civil expenditure. In the Bank of Israel increased investment alternative, we propose to implement the plan published by the bank, which requires expanding the government budget by 3.25% GDP. In the other scenarios we propose to increase expenditure by 5.1% or 9.8% GDP, to raise public expenditure or civil public expenditure to the OECD average. All of the alternatives that we examine can be funded, without significantly increasing the budget deficit, by raising the tax load to levels that are considered acceptable in many developed countries.

The results of the model indicate that Israel’s low level of civil expenditure is a policy choice and that rehabilitation of the civil services is possible.

Introduction

The October 7 war exposed the weakness of the government and civil services in Israel, which have been reduced, eroded and privatized over the last 40 years, particularly since 2003.

This process has had an ongoing, extensive impact on the quality and availability of civil services, leading to increased disparities in the accessibility of services, a negative impact on the quality of life of all the country’s residents, including the preparedness of the government and public agencies for crises.

The numbers do not lie: annual civil public expenditure in Israel is one of the lowest in the OECD due to an aggressive, intentional policy of eroding public expenditure. As of 2022, the disparity was at least approximately 171 billion ILS. This disparity results from a policy that was implemented in 2003, since prior to this policy Israel was very close to the OECD average .

Conclusive evidence of the disparity and the consistent policy of expanding it is the identical policy implemented by the Ministry of Finance and the government during both “regular” budget years and crisis periods: maintaining a limited budget framework at the expense of investment in civil services. In other words, Israel’s low investment in civil services is a long-term policy, and not a result of the current security situation.

This economic policy and its implications have been strongly criticized by important economic agencies, including the Bank of Israel and the OECD. Their conclusion is clear: the absence of investment in infrastructure and in strengthening human capital will lead to long-term deterioration of labor productivity and economic growth, and the already significant inequality will grow.

Despite the abovementioned and the noticeable, significant impact on social and economic security, the Ministry of Finance proposal for the 2024 budget is to reduce expenditure on civil services and thus destroy the civil safety net in Israel.

Thus, instead of increasing civil expenditure during this time of crisis, the Ministry of Finance and the government are implementing the reverse policy, which lacks any national, economic or social logic.

Now is the time to say: things can be done differently.

Rehabilitation of the civil services is possible and necessary, and will require a significant increase in government expenditure and abandonment of the fiscal austerity policy described above. In contrast, implementation of the current policy, which means continued reduction in civil public expenditure, is a clear choice to destroy the civil safety net in Israel, and even worse – during a war.

The relevant alternative, which will save the civil safety net, is increased civil investment, particularly civil expenditure, which will contribute to growth, and through a multi-year plan bring us closer to the level of expenditure of developed countries.

This alternative is based, among other things, on the Bank of Israel investment plan, which emphasizes the adoption of a multi-year budget expansion policy that will be funded by taxes or by taxes combined with a temporary increase in the budget deficit. This budget expansion will gradually bring the State of Israel’s civil expenditure to compatibility with the OECD average (“closing” a disparity of 90 to approximately 171 billion ILS, as of 2022).

Implementation of the expansionary policy alternative will lead to growth of approximately 14–19% GDP per capita in Israel compared to the existing policy. Accordingly, within approximately two decades (in 2043), civil expenditure per capita under the expansionary policy alternatives will be approximately 30–50% higher and will thus reach the desired level of civil expenditure.

This alternative is not being examined by the government, which discusses only the Ministry of Finance proposal for the 2024 budget, a proposal that preserves the budget policy practiced prior to October 7. This policy alternative will rebuild a strong civilian safety net, improve national resilience and return Israel to the path of growth for all.

In this booklet you can peruse in detail the “Day After” project, initiated by Arlozorov Forum in response to the revealed weaknesses of the government and civil services during the October 7 war. Our aim is to propose a suitable alternative for expanding the budget framework and rehabilitating the civil safety net, while maintaining a responsible fiscal policy.

List of Papers in the “Day After” Project