Posted tagged ‘budget’

Covering up election economics in Israel

December 21, 2012

In a month’s time, Israel goes to the polls. Bearing in mind the strict proportional representational system, the trends in the polls and the country’s habit for political coalitions, it seems that Prime Minister Netanyahu will not be moving home after the votes have been tallied up.

Elections around the world are usually decided by social and economic issues. Geopolitics in the Middle East has ensured that most campaigns in Israel since 1948 have been decided on matters related to defence and foreign affairs. However, what if that were not the case? What if Israelis put more emphasis on subjects that concerned the shekel in their pocket? How should the outgoing government be judged?

Since 2008, Israel has ridden out the global financial disasters in relative comfort. The stats of 3-5% growth annually, relatively low unemployment and a stable budget deficit ratio speak for themselves. During the current term of office, the country has been admitted as a full member of the OECD and the Tel Aviv stock market is now in the top ranking. So all is good and nothing needs to change?

Whenever a general election presents itself, the local media is always on the look out for “election economics”. In its simplest form, this means a government announcing a policy – often spending lots of money – in order to secure votes. Now, Netanyahu’s team cannot be accused of that. They have sat tight.

And that’s just the point. The Israeli economy is in urgent need of leadership and direction, but none is forthcoming. Everything is being delayed until after the polls have closed and after a new coalition has been formed. That could still be months away. Meanwhile, the politicians are busy praising themselves and past achievements,

Stanley Fischer, the governor of the Bank of Israel, put the matter out in the open for all to see. There is a gaping hole of 15 billion shekels, equivalent to nearly 4 billion dollars. How will that be tackled? Raising VAT by an additional 1%? Cutting back on child allowances? Cuts in the budgets of government services? According to newspaper reports, all this and more is being considered, but nothing is definitively planned. And so the budget debt will continue to grow.

As for public utilities, many services will announce prices from February onwards, well after the elections on 22nd January. The Electricity Company has been forced for months to buy supplies of gas from more expensive sources, due to crumbling relations with Egypt. Water prices, that have already soared 35% in three years, are due for another hike imminently. And when the middle classes receive their monthly pay cheques in early February, they may notice that their tax brackets have been changed adversely.

So what does this all add up to? The Israeli economy is not broke, but many things need fixing. The current government appears to be saying that it will carry on as normal, although it is obvious that this is short-term posturing. Painful changes will come into effect by Spring 2013, and the average citizens will pay for most of them. However, by then, they will have cast their vote. By default, that is another, yet short-minded and dangerous, form of election economics.

Election economics in Israel (2)

October 3, 2012

It is  nearly a month since I raised the hypothesis that a general election campaign could herald an unexpected benefit to Israel’s economy. Simply put, the law of the land will force the government to enact a temporary budget for early 2013. As this must be based on the 2012 budget, opportunities for unnecessary spending will be limited.

A month later, an amazingly long time in Israeli politics, and itis near certain that the country is heading for an election around February 2013. Ostensibly, the issue is that the Prime Minister, Netanyahu, and his Defense Minister, Barak, have fallen out with each other. Maybe. Theirs was always a love of convenience.

It could be argued that Netanyahu wants to pull the country behind him, as he has to reach crucial decisions over Iran. Very Churchill-like, but not very convincing.

The truth is that Netanyahu’s problem has been around for months and his elastoplast of spin is failing to cover up a bigger and bigger wound. The government has a major hole in its finances. The only way to grab control of the debt is to attack the very issues that are sensitive to his coalition partners. To be specific:

  • Barak, a former commander-in-chief, wants to add billions to his defense budget. Meanwhile, the treasury is demanding a cut of up to 4 billion shekels or US$1 billion.
  • The ultra-orthodox parties, known as a large family sector, are fanatical defenders of the high child benefits. Netanyahu has always been seen as their patron. However, now the  treasury is looking to cut around 20% or 2 billion shekels of these handouts
  • Without explaining here the historical irony, the core in the party of Netanyahu’s central committee, comes from the public sector. The treasury is hoping to cut wages and jobs by 4 billion shekels.

If you have not got it, there are two issues. First, Netanyahu probably does not have enough Parliamentary support for a tough budget. Second, rather than make the challenging economic decisions now, Netanyahu is playing politics with the one aspect of his political life where he has achieved outstanding success; finance and commerce. He is doing what he does best – nothing, delaying, putting off the inevitable and thus hoping something will come up that will allow him to get beyond the electoral process, while risking economic failure.

Today’s newspapers show that exports to Europe dropped 21% in July – August 2013 compared to 2012. VAT may have to go up 1% in January 2013, in addition to last month’s increase. Unemployment is on the rise. An editorial in the Jerusalem Post newspaper correctly argues that:

The downside of calling early elections is that  there will be no new fiscal budget prepared for the first months of 2013.  Instead, the 2012 budget will remain in effect without the necessary adjustments  made for population growth and inflation. And none of the pressing economic  issues will be addressed. A proper 2013 budget will probably not be in place  until May or June.

True, but there is also an upside. Similar to the previous elections after the global crisis in 2008, the government in Jerusalem will find it very difficult to spend its way to election victory. Yes, the existing budgetary gaps will remain, but they should not become more exaggerated through additional fiscal negligence. How the experts at the Bank of Israel will respond to this irresponsibility will be interesting to observe.

Cash flow and budgets – the difference and their importance to small companies

August 1, 2012

Last week, I answered the question “who needs to be concerned about cash flows?”.

A couple of days ago, I was giving a talk to some academics about how to start up a company. A question arose that confused the terms of budgets with cash flows, and even managed to mingle in the concept of profit and loss statements. So, I thought that I should return to the above theme from a different angle.

Assume that you are at the planning stage of setting up a company or have only been going a short time. You rightly feel that it is time to assess what everything will cost you and if it can be matched by potential revenues. This is the budgeting process – collating all known and relevant information going forward over a period such as the next quarter or year. And now, your budget for pre operations may shape differently to current operations, once you have started to turn over sales.

Great, but the bottom line is not necessarily your profit, (or loss), which is actually determined by how the transactions are recorded on your accountancy package. And just because you have rigged the numbers to show a healthy and positive figure, this does not mean that you will not need to be running to the bank for bridging loans!

There are two common reasons for this misfit: –

  • More often than not, you lay out expenses before you receive income
  • You have outlays – for example VAT or sales taxes – which are cash flow items, and these are not part of a planned budget.

In other words, cash flows and budgets are two separate but linked financial issues, which all companies have to assess.

To take this one stage further, I have suggested to several clients recently that they prepare a daily cash flow projection basis. Their objections have been numerous, usually based on how can they predict cash moevements when there is so much uncertainty. After all, they have budgets, which show in the long term how things will work out.

And here’s the point. I remind these same clients that they are being hounded by the banks because they cannot meet immediate payment demands like suppliers or wages. Change and survive, or I say to them. Welcome to the world of building simple and practical spreadsheets, which highlight your money problems well in advance. Welcome to the world of predicting cash flows.

Israeli economy & government intervention

July 31, 2010

However you twist the figures, the speed of the Israeli economic recovery is slowing down. The latest report from the Central Bureau of Statistics argues that: –

Economic indicators for the April- June period point to a continued slowdown in the pace of growth in imports of raw materials, trade and services revenue, industrial production and credit-card purchases….

Over the past 6 months, annualised GDP growth has dipped off by about 1.0 % to around 3.5% . On the other hand, the predictions for 2011 remain strong.

Citigroup expects the economy to grow 3.2% in 2010 and 4.2% in 2011. The Bank of Israel forecast is for the economy to grow 3.7% in 2010 and 4.0% in 2011.

Stanley Fischer, governor of the Bank of Israel, has pointed out several times that Israel was fortunate during the initial stages of the credit crisis. As the country was going through a general election, central government was weak. Nobody in authority was around to push through a large fiscal package. Debt did not go through the roof, as in the UK and elsewhere.

Yet last week,  a report was issued in America, which details why the very opposite was true for Washington.

Alan Blinder, a professor at Princeton, and Mark Zandi of Moody’s Economics (and one of the chief economic advisors to the McCain Campaign)….. argue that without any of the responses, 2010 GDP would have been 11.5% lower than it is likely to turn out, payroll employment would have been 8.5 million lower and we would now be facing outright deflation rather than just being at risk of falling into it, as we are now.

True, the American and Israeli economies faced very different challenges 2 years ago. For a start, Israel’s banks were sound.

However, there may be a need to move the local debate along. Today, Israel’s high tech sector needs help to reposition itself. The ultra orthodox and minority communities are not engaged in the labour force as the rest of society is. Infrastructure in the north and south remains weaker compared to the centre of the country. Primary and secondary education standards are continuing to slide.

None of the these are impossible issues to resolve. All require financial direction (and leadership) from the centre. Is it time to relax the purse strings?

Totting up Israel’s cash reserves

April 6, 2009

Today, Monday, the Israeli government posted two seemingly contradictory pieces of monetary news.

On the positive side, foreign currency reserves have passed the US$44 billion mark, a target long picked out by the Bank of Israel. Part of the latest jump resulted from an oversubscribed bond issue in Luxembourg, again another vote of confidence from overseas institutions in the Israeli financial markets.

Now switch over to government spending. Ouch! 

As in many countries, tax revenues are down and lower than initially predicted. The shortfall for 2009 could run close to 5% of GDP. As for expenditure, March was particularly bad. Large debt repayments became due and new unemployment expenditures have begun to kick in. 

What next? Today’s newspapers are full of leaks about forthcoming budgetary cuts, although many – eg reducing holidays – look like accounting fixes. The ship is not sinking, but the captain will need a firm and experienced set of hands to guide it through.