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The Jubilee Plan for Economic Freedom in Israel

Forward By: Jack Kemp

As we approach the fiftieth year since the state of Israel was reestablished as an independent nation in 1948-the year of jubilee according to the Law of Moses-the People of Israel face a glorious opportunity to expand freedom and revive prosperity for all the people of the region. The first trumpet call for jubilee was sounded at the recent elections. The new government has heralded that call by refusing to build a fence around the country, and instead Prime Minister Benjamin Netanyahu has committed Israel to an open economy for both Jews and Palestinians. This is very hopeful!

The outcome of those elections surprised many people around the world, leaving great challenges but also a great sense of hope and excitement at the opening of new possibilities regarding the future of peace and prosperity in the Middle East. Even more so in Israel, the people know the election of Prime Minister Benjamin Netanyahu signifies change, and that change means both risk and possibility-particularly the possibility for economic renewal, for increased self- reliance, and above all for extended liberty.

Notwithstanding the monumental progress which Israel has sustained under past and present leadership, changing conditions and developments demand new policies and different solutions. The indomitable spirit of the Israeli people has long kept them thriving in spite of adversity. But under long-standing economic decline, this precious resource of human ingenuity, determination and effort, is consumed without yielding the prosperity it ought. The new Prime Minister has a tremendous opportunity to unlock these economic fetters, unleash the resources in which Israel is already rich, and usher in an era of prosperity for the Israeli people-true cause for jubilee.

The plain fact is that Israel's economic slowdown began in 1974 and coincided with the onset of large scale U.S. aid. This aid, sent with the best of intentions, inadvertently caused a problem because, instead of directly feeding the economy, it was used to build and fuel the Israeli government. Certainly, government in and of itself is not an evil, but when government grows, lapping up more and more control and resources, it becomes counterproductive, not only to the people but for the purposes of government itself.

This is a problem with which we are very familiar in the United States. Though our government provides many valuable services, it overspends, overtaxes, and overregulates. In the process, it stifles the economy, fosters dependency and places an unwarranted burden on America's businesses, individuals, and families.

The challenge for America's leadership is to roll back governmental bureaucracy and oversight without destroying the most important functions and foundations of governmental authority. We know that we cannot tear down the walls overnight. We must look to a long-run objective of stimulating economic growth, and empowering the American people to provide for the well- being of themselves, their families, and their communities.

After twenty years of being fed by foreign aid, the government bureaucracy in Israel is in a similar predicament. It continues to expand to the point where it has become an enormous burden on Israel's economy. Government spending accounts for more than half of the Gross Domestic Product (GDP). The government sits on billions of dollars of assets-state-owned enterprises, state-owned land, and other resources-all inaccessible to the people who could use them to build growth-sustaining businesses and institutions. The government protects Israeli monopolies and cartels from internal and external competition, which has resulted in products high in price and too often low in quality. Moreover, not only does the Israeli government withhold vital assets and benefits from the people, it finds it necessary to raise the tax burden to confiscatory levels in order to bail out bankrupt socialist institutions.

The solution is to unleash the productive energies and genius of the Israeli people in order to build a robust domestic economy that will make it possible to eliminate the counter-productive dependency on foreign aid.

Israelis work hard to support themselves and their families. They work overtime and sometimes hold two or three jobs in order to make ends meet at the end of the money. They leave their jobs to serve a month in miluim (reserve duty) each year; make mortgage payments which grow larger not smaller after each payment; and give money to Sherutroms (telethons for soldiers) and charities whenever asked. Yet many who would be considered middle income wage earners in most countries, are expected to pay an effective marginal tax of 60% of every shekel earned. When indirect taxes like VAT are figures in, the average salaried employee gives the government about 43% of his income.

In effect, all the work done by average employees from January through June is for the government, and then they spend July in miluim. Only in August of each year do Israelis get around to working for their families.

Such intrusive tax policy erodes individuals' incentive to work and impedes their capacity to save and invest. Without capital in the people's hands, opportunity dries up, business formation comes to a halt and job availability crumbles. If the situation is allowed to continue, it will drive Israeli citizens abroad in search of greater economic freedom and opportunity.

As the labor and business pools shrink, so will the entire economy. Without serious reform, the government will have to extract more and more tax revenue from fewer and fewer resources until it becomes almost solely dependent on foreign aid-essentially losing that independence which is so precious to the Israeli people and government and which the aid was originally intended to advance.

The good news of the recent election is Israel's tremendous potential to avert this trap of economic deterioration. Israel has a wealth of resources, none more potent than its energetic and entrepreneurial people. They are the engine and freedom is the fuel that could boost the Israeli economy and lead to a new prosperity that will benefit the entire region. And, of course, the tides of war are from more likely to recede among those who share a growing economic interdependence and free trade.

The following study by the Institute for Advanced Strategic and Political Studies in Jerusalem, lays out the details of the Jubilee Plan, a blueprint for economic revival in Israel. By investing its own material resources back into Israeli individuals, families and businesses along the general line put forth in the Jubilee Plan, the government can eventually end its dependence on foreign aid, foster economic growth, and guarantee Israelis their own freedom and independence.

While I and others who read this study may not be in full agreement with each and every detail of the plan, I am confident that the Jubilee Plan provides a framework around which the people of Israel can unite. The give basic principles of the Jubilee Plan, it seems to me, are unassailable: sound money; returning state-owned assets to the private sector and fostering private ownership of assets; overhauling the Israeli tax system fundamentally; free trade; and streamlining and controlling the future growth of government. At the very least, I hope the leadership can agree to enact the Institute's First Year Plan (see page 13), which consists of four fundamental points of reform that can swiftly usher the Israeli people into an era of jubilee.

As the new Israeli leadership embarks on this historic undertaking, I would offer not only encouragement but also a word of caution derived from our experience in the United States. Keep your eye firmly fixed on the ultimate objective of creating more liberty and greater economic opportunity for Israelis and their neighbors. Every step along the path toward reform must be carefully fixed on that goal, lest the power of the entrenched special interests opposed to reform derail the process and delay indefinitely the promise of prosperity. At the same time, recognize that the journey cannot be completed overnight. Do not fall into the trap that establishes a balanced budget as the be-all and end-all of reform. Don't place the "cart" of fiscal austerity in government before the "horse" of economic growth and opportunity.

Balanced budgets are the result of a strong economy and a balanced political system, not vice versa. It is not that deficits don't matter, they emphatically do-in the same way that a high fever matters. Both are symptoms of much deeper maladies: In the case of deficits, the real malady is usually an anemic rate of growth in the economy and a political system that fails to set national priorities. It is just not enough to say that government is too big and that it overspends. The solution is to adopt policies such as those proposed in the Jubilee Plan that restore balance to the political system and allow the economy to grow fast enough to accommodate the level of spending produced through the democratic process.