Want to beat poverty once and for all? [pg. 15]

This week’s publication of the National Insurance Institute’s annual poverty report, which found that the number of people under the poverty line increased yet again in 2005, has prompted predictable demands for more government spending to combat poverty. And though MKs and social activists usually try to avoid saying how such spending should be financed, if pressed, most will eventually propose raising the budget deficit. Yet any government that is serious about reducing poverty over the long run, instead of alleviating it temporarily while ultimately making matters worse, should do exactly the opposite: reduce the deficit and pare down Israel’s long-term debt. To understand why, consider the following figures: Over the last four years, interest payments alone on the national debt have averaged some NIS 32.1 billion a year; last year’s figure was NIS 36.1b. That same year, total education spending came to NIS 33.8b., the health budget was NIS 22.3b. and welfare spending totaled NIS 21.7b. In other words, Israel spent more last year just on interest on its national debt than it did on either health, education or welfare. And since it also spent NIS 59.1b. on payments of principal, 2005’s total debt servicing costs, including both interest and principal, came to NIS 95.2b. – more than the NIS 77.8b. spent on education, health and welfare combined. Nor is this atypical: Every year, debt servicing accounts for about one-third of the total budget, leaving only two-thirds for everything else, from welfare to defense. Thus reducing the national debt, by reducing these hefty annual payments, would free up billions for additional spending every year.

IN MOST Western countries, as former Bank of Israel governor David Klein noted in a recent article, the national debt is about 60 percent of gross domestic product, requiring annual interest payments of some 2% of GDP. But in Israel, whose debt is a whopping 100% of GDP – about NIS 550b. – annual interest payments consume about 6% of GDP. In other words, reducing our debt by 40&, to standard Western levels, would reduce our interest payments by about 67%. Applying that to the 2005 figures, that would mean annual interest payments of about NIS 12b. instead of NIS 36b. Thus reducing Israel’s debt to accepted Western levels would free up some NIS 24b, a year in interest payments – the equivalent of the total health or welfare budget. And this extra money would be available not just once, but every single year – enabling massive long-term investments in education, job retraining and other programs that could really reduce poverty, as opposed to merely providing temporary relief.

CLEARLY, PARING down debt involves short-term sacrifice: Some money would have to be taken from other projects and used for debt repayment instead. Equally clearly, the sums involved are too large to permit rapid reductions: A NIS 220b. debt reduction plan would have to be spread out over many years. Yet over the long run, interest savings of NIS 24b. a year mean that the plan would effectively pay for itself within 10 years of completion. And even in the short term, since every shekel of debt reduction lowers interest payments, less than a shekel must be taken from other programs in order to finance it. The ideal time to reduce debt is when the economy is growing rapidly, since rapid growth means higher tax revenues, and with more income at its disposal, the government can pare down debt without cutting as deeply into existing spending. And Israel is currently enjoying very rapid growth: GDP grew by an estimated 5.2% last year, and the Finance Ministry has forecast 3.9% growth this year. Yet instead of taking advantage of this to reduce debt, the government plans to increase our debt still further in 2006: The proposed 2006 budget calls for a deficit of some NIS 17.2b., meaning the national debt would be increased by that amount. As a result, annual debt servicing costs will also rise. In fact, Israel’s fiscal policy for many years now has been one of perpetual deficits: Regardless of whether the economy is booming or shrinking, the budget calls for a deficit of about 3% of GDP every year. And therefore, every year, the national debt increases. Granted, there are years like 2005, when the economy grew faster than the debt, meaning that even though total debt increased, it declined as a percentage of GDP. But there are also many years when the debt grows faster than the economy – which is why the national debt has been stuck at around 100% of GDP for years.

ONE DOES not have to be an economic genius to realize that an endlessly increasing national debt, with its concomitant increase in annual debt servicing costs, means that over the long run, the country will have less money available for other needs. In other words, reckless borrowing today deprives our children and grandchildren tomorrow, since it is they who will have to finance the ever-increasing debt payments by cutting back on other spending. If, on the other hand, we take advantage of the current economic growth to start reducing debt, the concomitant reduction in annual interest payments would free up sizable sums every year that could be used to increase spending on other programs. Poverty is a long-term problem; it cannot be eliminated overnight. And therefore, any successful anti-poverty program will require investments stretching out over many years. But financing such a long-term program requires a long-term source of income. And the only realistic source of such income is the annual savings that would be produced by a serious program of debt reduction.