ISRAELI MARKETS STABLE IN FACE OF ELECTION

C O N F I D E N T I A L SECTION 01 OF 04 TEL AVIV 001181 SIPDIS E.O. 12958: DECL: 03/23/2016 TAGS: ECON PGOV EFIN ELAB PINR IS ECONOMY AND FINANCE GOI INTERNAL ELECTIONS SUBJECT: ISRAELI MARKETS STABLE IN FACE OF ELECTION UNCERTAINTY Classified By: Economic Counselor William Weinstein for reasons 1.4 b a nd d. -------------- Summary -------------- ¶1. (C) Israel's three main parties have all responded to the unusual attention being paid to social-economic issues in this election campaign. They have devoted considerable attention in their platforms to the need to narrow the ever-widening gap between the rich and the poor. The Labor Party, led by Amir Peretz, has made fighting poverty the centerpiece of its campaign. Although security and foreign policy issues have dominated the Kadima and Likud campaigns, both parties have also dealt extensively with socio-economic issues. The two parties broadly agree on the need to support the continuation of the 2003 Netanyahu reform plan, which called for increased employment, reduced taxes, and a reduction in the overall role of government in society. In response to the "poverty gap," however, both want to temper the "harsher" aspects of the reform program and support increasing allowances for those unable to help themselves, such as the elderly and disabled. Post-election, Kadima will likely initiate moderate new spending programs to address the issue of social inequalities, as long as revenue growth continues, and the new spending does not affect its conservative fiscal stance. The Israeli markets have remained stable as the political campaign nears its end. Even the realistic prospect that the "socialist" Peretz could end up in a very influential economics-related cabinet position has not caused any particular market jitters. End Summary. -------------- Parties Agree on Some Issues -------------- ¶2. (C) The Kadima, Labor, and Likud economic programs share many points in common. They all stress more assistance to the "weaker" sectors and to those who cannot support themselves independently, greater investment in education at all levels, creation of more jobs, development of the Negev and the Galilee, and programs to encourage more women to work. The Kadima and Labor platforms also address the specific problems of the Arab sector and discuss the issue of corruption. Kadima's economic plan is, however, much more extensive than either Labor's or the Likud's, but includes neither the specific price tags nor the time frames needed to accomplish its agenda. Labor stresses its "flagship issues" of gradually raising the minimum wage to USD 1,000 per month, closely regulating and monitoring the activities of manpower companies (which are accused of exploiting workers), instituting mandatory pensions for all citizens, increasing the number of treatments and medicines covered by the government's basic health basket, and increasing allowances for the elderly. In its economic program, the Likud stresses the need to cut taxes, and to continue the reform program begun when Benjamin Netanyahu was Finance Minister. This program includes continuing privatization, reducing the size of government, encouraging work, lowering tuition fees and the cost of public transportation, and developing the Negev and Galilee regions. -------------- Academic Economist Influences Kadima Platform -------------- ¶3. (C) The Kadima platform is largely based on a 32 page program developed by Tel Aviv University Economics Professor Dan Ben David, who is number 34 on the Kadima Knesset list, and likely to make it into the Knesset on March 28 if present polling proves accurate. Ben David developed his plan in October 2005 and called it "Wake-Up Call - A Work Plan for a New Era in Israel." In a January conversation with econoff, he expressed the hope that Meir Sheetrit, who was charged with formulating Kadima's economic platform, would use his plan as the basis for formulating Kadima's economic program, and said he would happily forego being credited for devising it. In its abbreviated six-page form, as in the original 32-page version, the plan is primarily a general outline of desirable social-economic targets for the GOI -- parts of which would likely be acceptable to most of the parties running in the Knesset elections -------------- Kadima: Change Spending Priorities -------------- ¶4. (C) The Kadima plan stresses the need to change spending priorities and maintain full transparency in the budget process. Ben David told econoff that there is extensive criticism by economic professionals of the convoluted budget process, which is understood by very few people, conducted by the Ministry of Finance. Even more important is having a full and open debate over what the GOI's spending priorities should be, and how to best narrow the ever-widening gap separating the upper and lower socio-economic rungs of Israeli society. Kadima lists the following as its main goals: -- increasing employment and earnings from employment. -- going to "war" against poverty in order to reduce social and economic gaps. -- increasing growth through higher productivity. -- strengthening the middle class. -- providing a security net for the elderly and disabled. -- strengthening the Negev and Galilee. -- reforming the health system. -- maintaining the environment and the quality of life. -- fully integrating minority populations. -- ensuring equal opportunities for men and women. -- reducing the number of foreign workers. Also specifically delineated in the Kadima program is the need to shrink the government by reducing the number of Cabinet-level ministries. This will almost certainly not happen unless Kadima makes an extremely showing of more than 40 seats and has great freedom and flexibility in constructing a coalition. This is so even though most of the parties running for the Knesset theoretically recognize that large governments are an unnecessary drain on the budget. The complexity of Israeli politics and the practical needs of building a viable coalition will likely require the distribution of all available ministries. -------------- Save Money on Defense -------------- ¶5. (C) The Kadima plan is similar in part to the Likud plan, in that both are reminiscent of aspects of Netanyahu's 2003 economic reform program. Although packaged differently than Likud's plan, Kadima's program includes the call to reduce taxes, reduce government expenditures, and execute reforms to increase competition in various sectors of the economy. All of the three main parties note the need to implement cost saving and efficiency measures in the military and defense sector as part of the change in national priorities and the need to reallocate funds. While Likud and Labor estimate that this would save about NIS two billion per year, Kadima did not include any specific figures in its program. In a February 14 interview with Army Radio, Finance Ministry Budget Director Koby Haber estimated that reducing army service, combined with other efficiency measures, would, in fact, save approximately NIS two billion per year. Rani Loebenstein, Senior Adviser to the Ministry of Finance DG, told the Econ Counselor on March 23 that the bloating of the military budget presents a major obstacle to controlling spending. -------------- No One Wants to Raise Taxes -------------- ¶6. (C) While the Labor Party platform explicitly states that it wants to raise government expenditures by a real two percent annually -- as opposed to the one percent increase allowed by the terms of the U.S.-Israel Loan Guarantee Agreement of 2003 -- Kadima's platform says only that Kadima will continue the trend of reducing the share of the budget allocated to the public sector as a percentage of GDP in order to significantly reduce the tax burden and national debt. Kadima is the only party addressing the need to reduce debt, with the Likud calling for reducing taxes rather than debt, proposing cutting corporate taxes to 20% and lowering the highest marginal tax rate on individuals to 40% from the present 49% rate. Kadima and Likud both note that high tax burdens negatively affect the willingness of the "weaker" sectors to work. In a March 22/23 interview with the Israeli business newspaper Globes, Labor leader Peretz said that he opposes raising taxes, but wants to reduce the VAT to 13% over four years from its present 16.5% rate. He also favors recognizing mortgages as an expenditure for tax purposes for younger couples to help them buy apartments. Kadima also supports the concept, but does not specify for which groups it would advocate this tax break. The Likud aims to cut VAT to 14.5%, while the Kadima platform, characteristically, does not include any specific numbers, but notes that the VAT is a regressive tax that is particularly harmful to the weaker economic sectors. Kadima also supports tax credits for child care, mortgages, and higher education. -------------- Employment is the Key -------------- ¶7. (C) Encouraging employment for all those physically capable is what Kadima views as the key to increasing growth and reducing poverty. It also wants to encourage more than one person per family to seek employment as a means to fight poverty. That aim reflects a statistic cited by Bank of Israel Chief of Research Karnit Flug in a March 2 speech showing that the incidence of poverty in families with two wage earners is only 2.9%, as opposed to the figure of 22.2% in families where only one person works. Kadima wants to provide incentives to encourage people to work, and supports the implementation of an earned income tax credit (largely referred to in the Israeli press as the "negative income tax"). Even though the Finance Ministry opposes it because of the bureaucratic problems involved in implementing it, the Likud has joined Kadima in supporting the concept. -------------- - Wisconsin Plan: Kadima, Likud: yes; Labor: NO! -------------- - ¶8. (C) Likud continues to support the Wisconsin Plan, which calls for physically able people to have their allowances cut off unless they undergo training to enter the job market. Kadima supports it in principle, but indicates that the plan has problems that will have to be adjusted. Labor's Amir Peretz has come out strongly against the plan, calling for its cancellation. In his March 22/23 Globes interview, he said that people require a framework that will lead them to seek employment. He indicated that education is the key to encouraging people to transition towards work, and proposed what he called a "national plan for human infrastructure." According to a March 10 interview with Yediot Aharonot, Peretz said that the plan would allow every unemployed person to study whatever he or she wants for at least four hours per day without its being conditional on the person getting professional training or looking for a job. He noted that the estimated 120,000 unemployed who would study under his program while continuing to receive allowances would thereby "get out of the house" and reenter society, paving the way for them ultimately to join the work force. All of the parties also stress the need for a provision of pensions of some sort for all citizens in need. -------------- All Want to Spend More on Education -------------- ¶9. (C) Kadima also stresses education, calling for a network that would integrate completion of secondary, professional, and vocational training, and that would also provide a "second chance" opportunity to those who did not complete high school or arrived as new immigrants. Kadima backs State subsidies for those persons undertaking these studies and calls for employers to cooperate with the government to subsidize training via the establishment of "technology centers" to train people in specialized skills needed in the workplace. Kadima also calls for every student, regardless of financial status, to receive a no-interest loan for the entire sum of the tuition needed for an academic degree. The loan would be repaid over a long period after the completion of one's studies. The Likud platform proposes reducing state university tuition by NIS 3,000 per year. -------------- Privatization -------------- ¶10. (C) There is no particular difference between Kadima and the Likud on the need to continue privatization. Amir Peretz, however, stated in the Globes interview that he is opposed in general to the privatization of infrastructure, hospitals, and social services. Regarding the particular situation of the Israel Electric Corporation, he said that he opposes its privatization until Israel is assured of a sufficient electricity supply through the entry of other companies into the sector. In a November 13, 2005 with Yediot, Peretz stated that "privatizations in Israel have become a fundamentalist religion, an obsession." -------------- Transportation Infrastructure -------------- ¶11. (C) The parties all refer to the need to continue to improve the country's transportation infrastructure. The government has already adopted this idea in the last few years with the goal of providing easy access to major metropolitan areas for residents of peripheral areas. The theory behind this plan is to effectively turn those areas into suburbs, and thereby reduce the economic gap dividing them from the center. -------------- Comment ¶12. (C) More than at any time in recent memory, Israel's election campaign has seen socio-economic issues share center stage with security-related issues. This was largely the result of the election of firebrand Amir Peretz as leader of the Labor Party and candidate for Prime Minister. Even before that, the Sharon government understood that it was vulnerable on socio-economic issues, and Ehud Olmert, upon entering the Finance Ministry after Netanyahu's resignation last summer, immediately assumed a more sympathetic tone, recognizing that not all sectors in society were benefiting from the economic growth of recent years. Netanyahu himself has been a lightning rod for criticism of his reform policies and, according to recent press reports, has recently publicly regretted the damage that his reformist policies may have caused to people, adding however, that the policies were necessary to save the economy. (Note: Netanyahu later denied such press reports. End Note.) ¶13. (C) In its 2005 "Article IV Consultation with Israel," which has just been released, the IMF notes that "despite the strong economic recovery, the incidence of poverty and income inequality have increased." It argued for consideration of targeted remedial measures that stay within the current fiscal framework and provide incentives to work consistent with growth-promoting policies. In terms of proposed economic policies, the Likud and Kadima platforms adhere to the IMF's guidance and share a great deal in common, stressing continued fiscal responsibility, while Labor stands somewhat apart, with its new leader moving it towards a substantially more socialist world view. Kadima will likely follow through with moderate post-election initiatives to address social inequalities, as long as revenues continue to grow and any new programs do not affect its fiscally conservative stance. The electorate as a whole, while recognizing the need to temper economic reforms with "compassion," continues to support the free-market reform program that has done so much to promote growth. ¶14. (C) A government led by Kadima -- what many refer to as Likud-Lite -- will do what it can to maintain fiscal discipline and not let the deficit get out of control, but this will be made more or less difficult depending on the ultimate composition of the coalition that will rule the country. Despite the emphasis on socio-economic issues, the Israeli stock and money markets and the foreign exchange rate have been very stable in the run-up to election day. This indicates that business and financial decision makers are not particularly worried that the economic policies of the new government will vary drastically from the policies that helped bring about the tremendous economic recovery of the last few years -- even if the pundits are right in their predictions that that Amir Peretz is likely to end up in an influential economic portfolio if Kadima opts to include Labor in its coalition. End Comment. ********************************************* ******************** Visit Embassy Tel Aviv's Classified Website: http://www.state.sgov.gov/p/nea/telaviv You can also access this site through the State Department's Classified SIPRNET website. ********************************************* ******************** JONES