NETANYAHU TO CODEL KYL ON ECONOMIC REFORMS,

C O N F I D E N T I A L SECTION 01 OF 03 TEL AVIV 000293

SIPDIS

E.O. 12958: DECL: 01/14/2015
TAGS: ECON EFIN PREL KWBG IS ECONOMY AND FINANCE GAZA DISENGAGEMENT ISRAELI PALESTINIAN AFFAIRS
SUBJECT: NETANYAHU TO CODEL KYL ON ECONOMIC REFORMS,
DISENGAGEMENT, AND PALESTINIAN ELECTIONS


Classified By: Ambassador Daniel C. Kurtzer for reasons 1.4 (b) and (d)
.


1. (C) Summary: Finance Minister Binyamin Netanyahu
outlined for CODEL Kyl and the Ambassador in a January 9
meeting the economic reforms he has undertaken during his
tenure. The reforms include cutting government expenses,
reducing taxes, privatizing some state-owned enterprises, and
fixing the pension system. Netanyahu explained to the CODEL
that his strategy in pursuing reforms has been to "come
prepared and act quickly" and to continue with other projects
that are in the works, such as breaking the banking duopoly
in Israel and decreasing tax rates further. Netanyahu also
discussed his views on the need for a national referendum to
implement the disengagement plan, and on the Palestinian
elections. End summary.

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Netanyahu's Economic Reforms
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2. (C) Finance Minister Binyamin Netanyahu on January 9 told
CODEL Kyl and the Ambassador that two years ago, Israel was
running a budget deficit of 7 percent of GDP, had both
negative GDP and negative GDP per capita growth, and was on
the verge of a financial collapse. He said he used the
crisis to implement an extensive program of structural
reforms, which included cutting government spending,
especially transfer payments; reducing taxes; and undertaking
privatizations. On the issue of privatizations, Netanyahu
explained that he has been working on the ports and airlines,
and is now also going to focus on the banking sector, noting
that Israel Discount Bank will be sold next week. He
concluded that after two years of decline, the economy is
currently growing at 4 percent.


3. (C) Netanyahu commented that he is reforming the bankrupt
pension system. He reported that the GOI has already taken
the pensions from the unions through legislation, privatized
them and committed government funds to balance them. In
addition, it has modestly lowered the benefits while
increasing the contributions, and raised the retirement age
from 60 to 64 for women, and 65 to 67 for men. He stressed
that while the problem of bankrupt pensions is a world-wide
phenomenon, it must be dealt with immediately in Israel
because Israelis on average live to 80 years of age, which he
claimed is the second longest life expectancy in the world
after Japan.


4. (C) In response to the CODEL's question on the public
response to pension reform, Netanyahu responded that there
had been a significant struggle with the labor union and that
welfare recipients set up tent cities to protest cuts in
their benefits, but his strategy was to "come prepared and
act quickly." He said it was important to "load up" the
reforms because Israel would "get a strike anyway" so it was
better to do them all at once. He also explained that
simultaneous reforms have a bigger cumulative effect on the
economy than taking a piecemeal approach. Netanyahu reported
that Israelis are better off with his reforms because their
salaries have increased, but that the media reaction has been
mixed because unemployment stands at 10.1 percent. He
explained that once unemployment drops to 9 percent, the
center of the country will feel the improvements, but Israel
should be able to get the unemployment figure down to 5
percent.


5. (C) Netanyahu added that he also reformed the child
allowances system. He said that Israel has the highest
population growth rate of any western country, with an
average of three children per family. Since child
allowances, prior to his reforms, increased with the number
of children in the family, families had more kids and were
thus able to "drive BMWs as their second cars." Netanyahu
reported that he is flattening out child allowances over time
and that most of this change has already been implemented.

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More Reforms to Come
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6. (C) In response to CODEL's question, Netanyahu said that
the GOI plans to tackle banking sector reform next. He
explained that two banks handle 80 percent of the
transactions in Israel, and that they do not provide any
services, yet charge exorbitant fees because there is no
competition. He also said these banks make poor lending
decisions, citing as an example the fact that 70 percent of
their credit goes to the top 1 percent of their customers.


7. (C) Netanyahu explained that he would soon be going into
wage negotiations with the port workers since the GOI is
breaking up the ports to increase competition, and that he
expects a strike on February 17 -- the day the Ports and
Shipping Law goes into effect to establish four government
companies. He also said he wants to take on land reform and
the Israel Lands Authority because 93 percent of the land in
Israel is state-owned, so the remainder is very expensive for
private owners. Netanyahu reported that the GOI plans to
spend a lot on infrastructure such as a railway system to run
from the central Israel to to Eilat in the south so that
Israel can compete with the Suez Canal for goods moving from
Asia to Europe. He added that he has decreased income taxes
from 65 percent to 49 percent, but wants to move further down
to 42 percent, and that he has decreased corporate taxes from
36 percent to 30 percent.


8. (C) Netanyahu noted that given the current environment of
globalization, countries should not wait to undertake
reforms. "Either reform now to a free market with tolerable
costs, or wait for a tragedy." He commented that the global
market generates punishing competition, so outsourcing and
privatization are the keys for governments because there are
few functions they can do better than the private sector. He
explained that his philosophy is "If you can work, go to
work. If you can't, we'll take care of you," but that this
can be done without a large government.

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The Disengagement Plan
--------------


9. (C) On the issue of withdrawal from the Gaza Strip,
Netanyahu reported that the idea came about because there was
no partner on the Palestinian side with whom to work. He
said Prime Minister Sharon never intended to stay in the Gaza
Strip because "it is not useful." Withdrawal "could not be
for nothing," however, because terrorists would claim a
victory over Israel as they did during the withdrawal from
Lebanon, leading to an increase in terrorism to force GOI
withdrawal from the entire West Bank and then from Tel Aviv.
To balance the scales, Netanyahu suggested, the GOI should
cordon off the Gaza Strip on all four sides because the
Egyptians will never wage a war with Palestinian militants to
stop smuggling and attacks on Israel. He expressed
satisfaction with President Bush's statement against the
right of return and his statement that there should be
territorial exchanges based on demographic realities.


10. (C) Netanyahu said he is concerned about the soldiers
who are refusing to follow the government's orders on
evacuating settlements, and described this issue as a
"palpable threat." He said there would not be a civil war
over the matter, but that it is very dangerous because it
would be difficult to implement the GOI's decision.
According to Netanyahu, the solution is for Sharon to hold a
referendum, even if he does not want to, because it would
knock out the majority of the resistance to disengagement.

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Palestinian Elections
--------------


11. (C) On the Palestinian elections, Netanyahu opined that
it is incorrect to assume that democracy begins with
elections and that the Palestinians will be a model for the
rest of the Arab world. He said it is important to note what
happens on the other side of the border, and explained that
the Palestinians are corrupt, undemocratic, and have a bad
education system that incites against Israel. He recommended
that the U.S. encourage the Palestinians to dismantle
terror, have transparency, and normalize their society by
ceasing incitement. If the Palestinians "continue to
malfunction," Netanyahu said, there will be "no movement at
all." With respect to HAMAS joining the political fold,
Netanyahu reported that "it's not going to work" and that
HAMAS needs to be "killed." He said the Palestinians need to
take concrete actions, otherwise Israel will not respond.

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Asking the U.S. for Help
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12. (C) Netanyahu explained that he has successfully
decreased the budget deficit from 7 percent of GDP to 3.9
percent of GDP, but that he expects the deficit to be 3.4
percent of GDP this year because of the disengagement plan,
construction of the seamline barrier, and other planned
reforms. In this context, he suggested that it would be
useful for the U.S. to press the international community to
help finance the construction of the barrier. If the
international community is concerned about the Palestinians'
quality of life, it should understand that building passages
in the barrier is expensive. He concluded by asking for help
with the security costs of the disengagement plan.

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