Minister of Finance Silvan Shalom made a serious of extreme statements in the past week about the need for dramatic changes in the state budget. Silvan, who just one month ago said there was not need for further budget cuts because "you can't drive the country crazy", is suddenly singing another tune ¿ the war, "the situation" and defense spending require a dramatic amendment of the budget.
The defense spending story is nothing more than a poor excuse: the additional spending on the military operation will be just a drop in the bucket of the ever-growing budget deficit.
A long time before the IDF entered Palestinian cities and a long time before Prime Minister Ariel Sharon authorized another NIS 2 billion for military spending ¿ months before any of this even happened ¿ it was clear the Minister of Finance had to cut NIS 7-9 billion from the state budget, if he had any hope of meeting the 3% deficit target.
At any point in time in the past year it has been clear that the budgets Shalom submitted to the cabinet and the Knesset were detached from reality. The security deterioration in the past month only increased the distance of that detachment.
War loan isn¿t about recent events
The Ministry of Finance can call the taxes, loans and other levies it plans to land on the public by any patriotic name they like such as "war loan" "security duty" or "Jenin levy". But economists know that what brought the treasury to the point of considering new taxes are not the events of the past month.
Shalom is not responsible for Israel's deteriorated economic situation in the past year. The global slowdown and security events that began in September 2000 are pushing the economy down the slope. Silvan's responsibility begins with his unwillingness to recognize the situation and act accordingly, through efforts to make his own life easier by avoiding unpopular steps and ends by throwing sand in the public's eyes.
Cutting the budget deficit by imposing new taxes is the easiest solution and the worst one for the economy; that solution increases the likelihood of recovery in the global economy that leaves the Israeli economy behind. If the package the treasury announces this week is based primarily on new taxes and loans, they should be called the "Silvan Peace Package" ¿ the Minister of Finance's political peace.
If unwillingness to take difficult steps can be attributed to the shaky political structure over which the cabinet has trouble ruling, the same cannot be said of the monetary council, a move initiated and led personally by the Finance Minister.
Under cover of a law designed to prevent the situation in which the Bank of Israel governor makes decisions alone, a goal even the central bank considers worthy, Shalom's people prepared a bill that enables the cabinet, should it so desire, to instruct the central bank to ignore its central goal ¿ price stability. The way the bill reached the cabinet and was ratified by the ministerial committee for legislation testify to its real aim ¿ destruction of Bank of Israel's independence and its subornation to the Minister of Finance and the cabinet.
Events in the cabinet and the Knesset in recent years have proven that the independence of the central bank is one of the economy's greatest assets and the last check on irresponsible economic policy. The stability of prices and the financial system in the past difficult year is not a given ¿ it is the result of Bank of Israel independence.
Heavy economic price
Silvan Shalom may not be in the Ministry of Finance when the economy pays the price for destroying central bank independence. It could take a month, six months or two years, but the end is clear. If the current version of the treasury¿s bill is ratified, it will carry a heavy economic price.
Bank of Israel governor David Klein has failed in his political lobbying and hasn't convinced Knesset members, Ministers of Finance or the public of the threats that face an economy like Israel's when central bank independence is damaged.
The time has come for the governor and Israeli economists to tell the public the truth: Behind the opaque phrase "maintaining price stability" is maintaining the value of public assets, maintaining the stability of the entire financial system, and mostly, maintaining the sanity of economic policy. The finance minister and his people will not be able to blame the economic damages that can stem from damaging Bank of Israel's independence on events in Jenin or suicide bombings.
Minister of Finance Silvan Shalom's name will be branded on the law to shake Bank of Israel independence just as the heavy taxes that could be imposed in the next few months will go down in history as the Silvan peace taxes and not the Jenin peace taxes.