POVERTY HYPE REFLECTS DECLINE OF SOCIALISM IN

S E C R E T SECTION 01 OF 04 TEL AVIV 007022

SIPDIS

E.O. 12958: DECL: 12/19/2015
TAGS: ECON ECONOMY AND FINANCE ISRAELI SOCIETY GOI INTERNAL
SUBJECT: POVERTY HYPE REFLECTS DECLINE OF SOCIALISM IN
ISRAEL

Classified By: Charge d'Affaires Gene A. Cretz for reasons 1.05 (b and
d).


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Summary
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1. (S) In advance of the upcoming elections, many politicians,
reporters,
and advocacy groups have been trumpeting "poverty" as the most
important
issue facing Israeli society. In reality, apart from a few isolated
pockets, Israel does not face grinding "third world-style" poverty as a
systemic problem. What it does face is a slowly growing gap between
the "haves" and the "have-nots," which has been exacerbated somewhat in
the last two years by the implementation of the economic reform program
of former Finance Minister Netanyahu. People in the lower
socio-economic strata have had their government benefits cut, but the
economic recovery has not yet been able to provide enough good new jobs
to compensate. The recovery has been strong in high technology and
finance, but anemic in traditional industries such as food and textiles
keeping the unemployment rate at a still high 8.9 percent. The attacks
charging Netanyahu and his reform program with responsibility for a
dramatic increase in "poverty" in Israel are misleading, at best, and
demagogic, at worst. They are really an attack by entrenched economic
interests on Israel shifting economic priorities. These interests,
primarily the labor unions and others who hearken back to Israel
socialist
past have lost the fight to control Israel economic future.
This loss has generated a backlash, which has turned into a political
battle over those who are still "left behind" by the recovery.
Regardless, the furor over "poverty" is bringing attention to the
growing inequality in the society, and any government formed after
the March 28 election will have to address the issue. End Summary.

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Inequality the Issue, Not Poverty
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2. (S) The issue of "poverty" has taken center stage in the Israeli
election campaign, especially since the election of Amir Peretz to head
the Labor Party. Former Finance Minister Netanyahu has become a
lightning rod for criticism, even from within his own political party,
that his policies were "heartless" and dramatically increased poverty.
Several NGOs have recently issued reports to demonstrate an increase i
poverty, which the press highlighted with alarmist headlines. This has
surprisingly, kept the election campaign more focused than usual on
economics, even with the recent terrorist attack in Netanya and the
furor over claims by a Sharon adviser that Sharon would eventually
divide Jerusalem and withdraw from 90% of the West Bank. However, the
true message of the poverty reports is not that many Israelis live in
abject poverty, but that the gap between the "haves" and the "have-nots
has widened as wealthier sectors of society have benefited more quickly
than the "poor" from the economic recovery.

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Bachar Committee on Poverty Formed
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3. (S) Even before Peretz election, the issue of poverty was becoming
increasingly important in the Israeli political arena, to the point
where then Acting Finance Minister Olmert, upon succeeding Netanyahu in
office, made repeated statements about the need to increase spending to
address the issue. Olmert had fully supported the Netanyahu reforms
while serving in the Sharon government, but sensed that their impact on
the lower socio-economic sector was becoming a major political issue.
While the government has promised to continue to adhere to the Loan
Guarantee Agreement terms, which call for a budget deficit maximum of
three percent of GDP and a maximum increase in the rate of expenditure
growth of one percent, Sharon and Olmert felt enough heat on the issue
to appoint the "Bachar Committee on Poverty." The committee, named
after its chairman, Finance Ministry Director General Yossi Bachar, was
tasked with generating ideas on ways to alleviate poverty. The report
on its conclusions was supposed to come out at the end of November, but
committee member Karnit Flug, Director of the Bank of Israel Research
Department, told econoff at that time that the committee had not yet
completed its work. On December 18, the Committee met with the PM and
the Finance Minister to discuss its preliminary findings. According to
the websites of the PM and MoF, they discussed a recommendation for a
seven year NIS 14 billion ($3.04 billion) plan. The PM and FM asked th
committee to devise a specific plan with timelines for implementation.
In addition, they also asked to hold a meeting within the next month t
discuss the possibility of adopting an earned income tax credit. (Note
The PM December 18 stroke casts doubt on when/whether this meeting
will take place. End Note)

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Make it Easier for People to Work
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4. (C) Flug said that the committee would not recommend radical
solutions, but would rather suggest incremental ways to help alleviate
some of the difficulties of those who have not yet benefited from the
rising economic tide, especially those whose allowances were cut, but
have not yet found stable employment. The idea, she said, was to make
it easier for people to join the work force, for instance, by having th
government pay for child-care while a mother goes to work. The money
spent would more than be made up for in the long-term by successfully
integrating the beneficiary into the full-time tax-paying work force.
Another controversial idea under discussion is a U.S.-style earned
income tax credit, which Flug indicated is being mistakenly referred to
as a "negative income tax" by the press. She said that the
program
success in the U.S. has brought about an examination of its
applicability in the Israeli context, although many - including some in
the Finance Ministry - oppose it as a bureaucratic headache, which will
accomplish little.


5. (U) According to press reports, other ideas under consideration by
the Bachar Committee include encouraging the building of factories in
the Arab sector, providing incentives for Arab and ultra-Orthodox Jewis
men to find jobs, increasing subsidies for training and education in
underdeveloped areas, giving incentives to employers to hire new
workers, increasing assistance to the elderly, and lowering health care
taxes on low income wage earners. These press reports substantiate
Flug contention that the committee emphasis is on finding ways to
make working a more attractive option, and to move people off of
allowances, rather than to return to the "culture of allowances" that
had prevailed prior to the reforms.

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IMF: Maintain Fiscal Discipline
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6. (U) The preliminary IMF report on the Israeli economy issued on
December 12 agreed with the thrust of the Bachar Committee thinking.
It recognized that cuts in benefits have harmed certain groups such as
the elderly and disabled, and those unable to work, and that it is
necessary to retain a social safety net for their benefit. But it
stressed the need to remain within the present fiscal framework, and to
provide incentives that encourage people to work.

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National Insurance Institute 2004 Poverty Report
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7. (U) The poverty line in Israel is defined as 50% of median net
income. In 2004, the line stood at NIS 1,777 (USD 386 at the present
exchange rate of 4.6) per month for an individual and NIS 4,548 (USD
989) for a family of four. These figures are about 25.5 percent and
65.4 percent of average monthly income of approximately NIS 6970 (USD
1515). In August, the National Insurance Institute provided the
impetus for the increased discussion of the poverty issue when it put
out a report, which indicated that the number of people falling below
the poverty line had risen from 1,426,800 in 2003 to 1,534,000 in 2004.
In addition, it said that the number of children living in poverty
increased from 652,400 to 713,600 and the number of impoverished
families increased from 366,300 to 394,200 in the same time frame.
These statistics say that about 22 percent of the Israeli population
lives under the poverty line, up from fourteen percent in 1990, before
any attempt had yet been made to rein in the welfare state. The very
large number of people living beneath the poverty line now indicates
that the measure used casts a very wide net, and that many people have
been hurt by the cuts in government benefits. However, most of them do
not live in abject poverty and will likely benefit from continued
economic recovery. The National Insruance Institute is scheduled to
issue updated figures soon.

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Advocacy Group Says Poor Get Poorer
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8. (U) In addition, the ADVA Center for Information on Equality and
Social Justice in Israel will shortly come out with its annual report
on the economic situation of the disadvantaged in Israel. There have
been numerous leaks to the press about its contents. The report will
say that the economy has experienced unbalanced growth, with investment
and high wages being concentrated in only a few sectors. According to
ADVA interpretation of statistics released by the government Centra
Bureau of Statistics, the high technology sector grew its contribution
to GDP by 100% since the early 1990s, while the insurance, banking, and
real estate sectors grew by 50%. In contrast, traditional industries
such as food and textiles, in which many of the working poor are
employed, grew by only four percent. The net result, according to
ADVA, is that the rich have gotten richer and the poor poorer.

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"Social" Economist Sees Severe Societal Deterioration
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9. (S) In contrast to ADVA conclusions, the real message of the
statistics is that there has been some temporary deterioration in the
situation of those whose allowances were cut and who have not yet found
jobs. However, other than amorphous anecdotal accounts, there has been
no documentation to suggest that these people are suffering from true
abject poverty, and that their children are going to bed hungry. In a
meeting with econoff, Hebrew University "social economist" Momi Dahan,
former Senior Advisor to the Finance Ministry DG, and an advocate of a
strong welfare state, said that the face of Israel has changed
dramatically over the past fifteen years. He described a Dickensian
society where poverty is rampant, many cannot afford food, and soup
kitchens are ubiquitous, saying that it reminded him very much of the
United States. He gave little credit for the economic "recovery" to th
reform program, but ascribed most of it to the wind-down of the intifad
and the return of global prosperity. He did, however, credit Netanyahu
with maintaining fiscal discipline, which he said is important. His
prescription for dealing with poverty is to keep the deficit under
control, but reintroduce high taxes to pay for the costs of necessary
welfare programs. His main contention was that in welfare states, such
as Sweden, poverty is not an issue, but that in other types of
societies, such as the U.S. and Israel (now),it is. However, when
asked the source of his information on the spread of soup kitchens and
other such facilities, he said that the evidence is what he sees with
his own eyes every day - in other words, anecdotal.

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Growth Will Eventually Reach the Bottom Rungs
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10. (S) Dahan illustrates the "sky is falling" atmosphere prevalent in
Israel today regarding poverty. Some, such as Gil Bufman, Chief
Economist at Bank Leumi, and Yossi Gordon, Deputy Budget Director at th
MoF, dismissed the poverty issue out of hand in discussions with
econoff. Bufman said something to the effect that an impoverished perso
in Israel is someone who does not own a cell phone. Gordon was
similarly dismissive. Both acknowledged that the problem Dahan
addresses is real, but said that his characterizations of it are
exaggerated. Once the economy has the time to work through the
dislocations brought about by the reforms and the new demands of the
world economy, the benefits of economic growth are likely to reach thos
on the bottom rungs as well, whether they be Jews of North African and
Middle Eastern origin, ultra-Orthodox Jews, Arabs or Druze, or the
elderly.

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The Fight is Over How to Divide the Pie
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11. (C) The situation of most of the "poor" has remained fairly static
in recent years, while the well-off have experienced a period of
prosperity. However, as written on December 13 by the economics
reporter for Ma riv, Moshe Perl, the issue is the need to "understand
the difference between the battle to increase the size of the cake and
the battle over how it is divided up. The furious socio-economic
controversy taking place here now does not succeed in making that basic
distinction. People who are not satisfied with the manner in which the
fruits of economic growth are being divided have launched a public
campaign against the very methods and the plans which made that growth
possible . . . .

Under no circumstances must we do away with a policy which has made
growth possible just because it emerges that its benefits are not share
as we would wish." In a December 12 ruling, the Israeli Supreme Court
rejected an appeal by numerous advocacy NGOs demanding that the Court
order the government to reinstate the allowances that were cut. The
Court said that the country has an obligation to take care of those in
need, but it is up to the elected government to decide how money should
be spent.

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Peretz Will Not Bust the Budget Framework
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12. (S) However the March 28 elections turn out, Amir Peretz and the
Labor Party are likely to have great influence, certainly more than
they have had in the recent past. The PM health problems also point
in that direction. When Econoff posited to several economists the
likelihood that Peretz could end up as Finance Minister in a government
headed by Kadima/Sharon, they agreed that it was a very realistic
scenario. They added that regardless of whether or not Peretz holds th
Finance portfolio, his (mostly unknown) economic views will likely have
great influence on the policies of the next government. Momi Dahan was
very enthusiastic about the prospect. Daniel Doron, Director of the
Israel Center for Social and Economic Progress, and a contributor to
some of Netanyahu reform plans, said it would be a "disaster."
However, the consensus among those econoff talked to (excluding Doron)
was that Peretz is beginning to gather knowledgeable industrialists and
economists around him, such as Avishai Braverman, the President of Ben
Gurion University, and Benny Gaon, a respected businessman. Both Dahan
and Bufman (of Bank Leumi) said that Peretz will quickly understand,
once he is in a position of power, that there are limits to what he can
change - the market will only allow him to go "so far, and no further."
He will be constrained by the LGA terms and will not likely attempt to
bust the budget framework. All agreed, however, that he would insist on
drastic cuts in areas such as defense in order to finance considerably
increased social spending.

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Economic Reform Had to Happen
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13. (S) Israeli society has experienced tremendous upheavals during
the past two decades. First came the first intifada in the late 1980s,
the mass immigration of about a million people from the former Soviet
Union and Ethiopia, the Oslo Peace Process, and the hi-tech bubble.
Then came the second intifada and the global hi-tech bust, both of
which severely affected the Israeli economy, and forced changes in the
old ways of doing things. Israel socialist heritage, the vestiges of
which still maintained strict controls on foreign and domestic
investment, and conferred enormous power on large unions and
publicly-owned companies, had to give way to the modernized system that
is being created by the reforms. Trade is Israel lifeline, as it has
no resources other than its people. Without reforming its economy and
opening it up to the world, it would not be able to compete.

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Socialism Writ-Large is Dead
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14. (S) With every upheaval, there are winners and losers. The
losers, in this case those associated with the large unions, the
kibbutzim, the large government-owned companies, and many who were
simply raised on the ethos of "Socialist Zionism," have been fighting a
rearguard action to maintain their influence. Exaggerating the issue o
poverty is one of the weapons they have used. However, barring a retur
to violence, a continued economic recovery will eventually reach many o
those who remain left behind. Regardless of the relative popularity of
the populist Amir Peretz as the head of the Labor Party, the "poverty
mongers" understand that the decline of the socialist ethos in Israel,
which began with the Labor Party loss in the 1977 elections, is now ver
advanced - thus the severity of the reaction.

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