How Israel's Ministers, and Not its Civil Servants, Made the Tough Decisions that Grew the Economy https://mosaicmagazine.com/response/israel-zionism/2020/09/how-israels-ministers-and-not-its-civil-servants-made-the-tough-decisions-that-grew-the-economy/

The Budgets Department sees everything through the lens of fiscal restraint, but growing a country requires a different understanding, as well as a broader sense of responsibility.

September 21, 2020 | Yechiel Leiter
About the author: Yechiel Leiter is a senior fellow resident scholar at the Kohelet Policy Forum. He has served as deputy director-general of Israel’s Ministry of Education and as chief of staff to Israel’s minister of finance.
This is a response to Israel’s Deep State Is Undemocratic, Unaccountable, and Completely Indispensable, originally published in Mosaic in September 2020

Then-Finance Minister Moshe Kahlon with his deputy Itzhak Cohen and his budget director Shaul Meridor on September 23, 2019. Flash90.

In “Israel’s Deep State Is Undemocratic, Unaccountable, and Completely Indispensable,” Haviv Rettig Gur opens a window into the workings of Israel’s bureaucracy that is usually shut and frosty, engagingly and insightfully exposing a little-known yet critically important area of Israel’s political culture.

Gur offers two cheers for those bureaucrats. In my view, they don’t deserve them. It is Gur’s claim of their indispensability that I mean to press against most. That the process whereby functional control of the state budget is placed in the hands of unelected and unaccountable twenty-something-year-olds is undemocratic is indisputable. That the politicians depend on this select group to save them from themselves and keep the country functioning despite political turmoil is another matter. Far from offering two cheers for the deep state, most politicians and public officials would in fact offer three cheers for ending it.

 

The monitoring of government spending is essential and the “n’arey ha-otsar”—“treasury youth”—of the Finance Ministry’s Budgets Department are certainly fit for the task. When Israel was faced with runaway inflation in the mid-1980s, the national unity government under Shimon Peres took dramatic steps to put the country’s economy in order. Turning to the ministry’s stars to ensure the reforms were implemented properly was prudent, as Gur skillfully explains.

But monitoring is no replacement for governing. When the current system was put in place, there was no intention among its architects to have number crunchers, talented as they are, arrogate to themselves authority that belongs to elected officials. Yet that is precisely what has happened over the years, and it comes with serious costs. Put in psychological terms, the drive has outgrown the motive.

Gur explained many of these costs in his essay, but let’s restate them as clearly as possible. Top-level civil servants in government offices, including directors general who have years of experience in management, cannot move a single shekel from one budget line to another without the approval of Budgets Department officials bereft of actual management and subject-matter experience. In fact, they can’t even transfer funding from one project to the next within the very same budget line without permission.

The result is that, in order to get anything done, elected ministers have to prostrate themselves before those with real authority but no accountability. In the same if-you-can’t-beat-’em-join-’em spirit, they’re often forced to pass over experienced professionals when choosing their all-important director-general deputies in favor inexperienced bureaucrats from the Budgets Department—people whose central value is knowing how to pull the right strings with their former colleagues.

One argument made to sanction this phenomenon is that the bureaucrats are straight shooters with only the sturdy aims of good governance at heart, while government ministers have ulterior motives of political posturing. This may or may not be true, but it’s not the bureaucrats’ responsibility to stop the politicians’ bad behavior. The political and justice system can actually handle that task fine on its own. Indeed, the unscrupulous among Israel’s politicians are invariably held to account, whether by the police or by the electorate.

But the bureaucrats? They’re not as impervious to selfish thinking as they would have you think; consider the unusually well-paid jobs they manage to secure after “doing time” in government, where they’re deeply involved in consequential decisions that affect their potential future employers. Another unspoken secret is that some of them have political pretensions themselves, as is claimed about the recently resigned Shaul Meridor, the central figure of Gur’s essay. If true—as seems likely from Meridor’s unsanctioned meeting with Benny Gantz during the recent election cycle—his forced resignation would be a case of elected politicians saving the bureaucratic class from itself (and democratic norms along with it).

 

The most common defense of this state of affairs, and the main thrust of Gur’s thesis, is that the chaos of Israel’s politics has obligated the country’s bureaucrats to adopt the role of adults in the room—that Israel would be in dire straits were it not for them. There is much evidence that shows this not to be the case. Israel has emerged as an economic powerhouse, and that is due not to bureaucratic intervention but to difficult decisions that were made at critical junctures by the very politicians from whom “the country needed to be saved.” In Israel’s case, at least, political volatility and economic stability are not mutually exclusive.

Let’s look at the period Gur focuses on. In the second half of the 1980s, Israel had three national-unity governments in less than six years. It was a period marked by acute political instability, in particular by a constant tug of war between Yitzḥak Shamir’s Likud and Shimon Peres’s Labor party and their incompatible views on how to achieve peace with the Arabs. Yet the period proved vital for economic stability.

The first of these teetering governments saw Peres at the helm, with Yitzḥak Modai as minister of finance. The two advanced an economic stability plan in 1985 that dramatically reduced business-sector subsidies, put a freeze on wages, and increased supervision of organized labor. These policies, which the Likud had tried to accomplish since first coming to power seven years earlier, could not have been accomplished without bringing the Histadrut labor union on board, which couldn’t have happened without the Labor party’s presence in the unity government. The result was stunning: a reduction of annual inflation from 800 percent to under 20 percent in less than a year, a contraction of the deficit and the trade imbalance, and a rise in the real value of wages. (Gur’s dubbing of Israel’s economy at that time as “Venezuela-style” is excessive; Israel’s economy was never based on one commodity and its inflation rate was never measured in the tens of millions.)

These structural changes to Israel’s economy demanded consistency, which was achieved precisely because of and not despite the varied political constellation. Yes, governments kept collapsing, but they also kept re-forming, and Labor and Likud continued to share power, thereby keeping the economic reforms on track. The timing could not have been more propitious, as the early 1990s saw the arrival of over a million Jews from the former Soviet Union. Had successive governments not implemented these reforms, the country would not have been equipped to increase its population overnight by over 15 percent.

By that time, political wrangling had forced a conclusive rupture between the two major parties. Yitzḥak Shamir’s narrow coalition had to face off with a newly empowered Budgets Department opposed to expanding the deficit in order to accommodate Russian-Jewish absorption. Luckily, the coalition had a strong minister of housing in Ariel Sharon, who, when the finance ministry demanded that he stop spending the planned housing budget, responded by declaring firmly that “there will be no homeless in this country, period.”

Ten years later, it was not Finance Ministry bureaucrats but the broad-based government of national unity under Ariel Sharon that put a stop to the economy of powerful monopolies, endless strikes, heavy taxes, and a culture of handouts that had evolved over the preceding decade. These reforms were accelerated in 2003 when Sharon appointed Benjamin Netanyahu finance minister. Within less than two years the Israeli economy underwent a free-market revolution. The government stood up to the labor unions and welfare lobbies, taxes were cut, spending slashed, monopolies broken up, state-owned companies privatized, competition promoted, and the pension system overhauled.

As a result, the economy immediately began to grow, jobs were created, unemployment decreased, wages increased, the stock market soared, and the price of issuing government debt dropped dramatically. Israel joined the Organization for Economic Co-operation and Development shortly afterward, and the stage was set for the country to weather the international economic crisis of 2008-9. The staff of the Budgets Department was an enthusiastic and capable partner in implementing these dramatic reforms, but it was the particular political constellation that made the difficult decisions possible.

Incidentally, the credit for those decisions has redounded in ways that might have been surprising then. Those long-term economic benefits could only be achieved by hurting certain sectors of the population in the short term; what could be better for Sharon than to take credit for the reforms from the winners while having his political nemesis Netanyahu absorb the anger of the losers? Much of the reason Netanyahu has subsequently become Israel’s longest serving prime minister is because he paid that price, and afterwards reaped its rewards.

 

Back to the bureaucracy. As the housing example above shows, the Israeli bureaucracy’s single-minded pursuit of fiscal responsibility can sometimes prove short-sighted and insufficiently responsive to broader national goals.

The Budgets Department sees everything through the lens of fiscal restraint; that is how its success is measured. There is no question that maintaining sound economic management—hoarding and hiding reserves as documented in the comptroller’s scathing report mentioned by Gur aside—is a critically important function for a country, but it is not the only function. Growing a country and its economy requires a more wide-ranging understanding of the times, as well as a broader sense of responsibility.

The massive housing campaign mentioned above is but one example. Finance Ministry bureaucrats opposed water desalinization projects for years, arguing that they weren’t fiscally responsible. If elected ministers hadn’t forced the issue, Israel would now be facing a water catastrophe, just like its neighbors. Thanks to desalinization, the country today enjoys a water surplus, has doubled its exports of water to Jordan, and is now beautifully positioned to extend those exports as far as its new Gulf-state allies. Had the bureaucrats had their way, none of this would have happened.

The same is true of road development. Most large-scale road planning for Israel’s northern and southern periphery is held back by the Budgets Department for a supposed lack of feasibility. But the fact that there isn’t currently sufficient travel on existing roads to justify expanding them is precisely the reason why new roads need to be built. Only once the Galilee and the Negev are made more attractive for settlement and business development will settlement and business development occur.

These are not factors that fit the Budgets Department purview, nor should they be. It is for it and its staffers to sound a warning when government policy is being implemented irresponsibly; it is decidedly not for them to make that policy in the first place. That latter task is, for better or for worse, what we have elected officials for. When and if Israel’s bureaucrats go back to their core task of being “gatekeepers” and “bad boys” for halting financial negligence and abuse, they will truly be acting democratically and indispensably at the same time. Conversely, if the present trend continues, they will ultimately need to be dispensed with so that Israeli democracy can function properly.