By Dan Keeler
Steinitz: One-year budgets are a “terrible mistake”
Just two years after being mired in the depths of the global financial crisis, Israel is experiencing a sharp and sustained recovery that is the envy of many other developed countries. Much of the credit for the remarkable turnaround goes to Israeli finance minister Yuval Steinitz’s innovative recovery strategy—a strategy he is now encouraging other countries to adopt.
Central to Steinitz’s strategy for pulling Israel out of recession was a decision to switch the government budget to a two-year cycle. Having taken over as finance minister at the height of the global crisis, in late March 2009, the former professor of philosophy and logic also took a fundamentally different approach to those of other developed countries’ finance chiefs in structuring his nation’s budget. “In most countries, governments radically cut taxes, because it is the best way to inject more oxygen into the economy,” says Steinitz. “We raised taxes—temporarily—but with a commitment to cut taxes steadily for the following seven years.”
Steinitz based his decision on the belief that future tax incentives are better at motivating economic activity than current tax cuts. “You should never sacrifice the future of your economy in order to save your economy in the present. If the future is gloomy, it will discourage present activity,” Steinitz comments.
Steinitz, who describes one-year budgets as “a terrible mistake,” believes that promising future tax cuts actually stimulated economic activity in the short term, while the two-year budget demonstrated the government’s confidence in the economy’s long-term prospects. “It shows we’re focusing on the recovery phase rather than struggling from day to day. It introduced some certainty in the middle of the panic,” he says.
The impact on an economy that had suffered three quarters of negative growth, a 30% slump in exports and soaring unemployment was immediately positive. Two months after the policy had come into effect, the economy stabilized. In four months growth turned positive, and within six months it was strongly positive, Steinitz says. the country ended 2010 with 4.5% GDP growth, created 120,000 jobs over the year and saw unemployment return to its pre-crisis level of 6.7%.
Steinitz recently gained some heavyweight backing in his campaign to persuade the world’s finance ministers to follow his lead after the IMF commented that the implementation of the two-year budget was one of the reasons Israel came out of the crisis better than other countries. According to Steinitz, the IMF is also considering recommending that other countries examine the model. “I believe it will contribute to stability and economic growth worldwide if countries across the globe adopt a two-year budget cycle,” he asserts.