מחדשים את השכונה

We have become inured to disappointment in the last few years. It was therefore hardly a bolt from the blue when the national figures the Central Bureau of Statistics published for the second half of 2002 were far, far worse than it had estimated just a month beforehand.

The stinging rebuke the prime minister delivered to the state statisticians for their gloom on the eve of elections couldn't have helped yesterday either. Of the 845 words in the bureau's press release, not one conveyed the slightest hint of cheer.

• Gross domestic product - the sum of all products and services, indicating the level of economic activity at its most broad definition ¿ dropped by 0.4% in the second half of 2002, in annual terms. For the whole year, GDP had contracted by 1.1%.

The most troubling aspect is that 2002 was the second consecutive year in which GDP contracted, and the first half of 2003 looks like the start of the third.

Israel's economic activity has never contracted continuously for such a long period of time. There are few precedents for such contraction elsewhere, either, in recent years.

• The finance minister's wife indulged in a whirlwind PR campaign on Monday, ahead of the prime minister's decision on Israel's next finance minister. She repeated her husband's claim that Israel's economic crisis is merely mirrors the security situation and the crises weighing on the world economies.

For the sake of accuracy, we should note that the global economies generally grew last year, while Israel's did not.

In fact, GPP growth comparisons are relatively flattering to us, because unlike in most of the west, Israel's population is multiplying rapidly through natural reproduction. So if we compare the behavior of GDP per capita ¿ meaning, GDP growth with population growth factored in ¿ then we find something frightening. GDP per capita contracted by 3.1% last year, after dwindling by 3.2% in 2001. Meaning, Israel's standard of living has dropped by more than 6% in two years.

• Private consumption ¿ which grew steadily for the last ten years, including during leaner economic periods - dropped 2.9% in 2002, per capita.

That is the most palpable measure of the dropping standard of living, of the increasing number of families with unemployed breadwinners, and mainly, of the erosion in consumer confidence, and of escalating anxiety regarding the future.

Even more frighteningly, import figures for January signal that private spending will drop another notch this year, as hundreds of thousands of families digest that the crisis of the last two years isn't about to end any time soon.

• But it isn't only Israel's households that are running scared. Investments, indicating the confidence of the business sector in Israel's economic future, have declined even more steeply.

Investment in fixed assets, meaning in homes and construction, in equipment and vehicles, contracted by 8.7% in 2002, in annualized terms, after shrinking 8.3% in the first half.

Investment in the various sectors shriveled by 12.8% in the second half of 2002, in annualized terms, after contracting by 7.1% in the first half.

Not everything is withering

• Yet what grew in 2002? The government, of course! The government continued to gain weight last year.

While the business product contracted by 3.1%, and households hunkered down, public consumption continued to expand, ending 2002 with a sharp increase of 5.5%. Israel's economic pie may have grown smaller, but the government's piece grew bigger.

• The miserable figures showing the growth of public consumption while the economy slows down could be a good starting point for the debate that can be expected to start over introducing an anti-cyclical macroeconomic policy.

Proponents of anti-cyclical policy believe that to rescue the economy from its vicious circle, the government should increase its deficit, to pour money into the market in order to jumpstart the economic engine.

The government's current budget is expected to create a deficit of 5% of GDP. Should it expand that deficit even more? Would the domestic or international capital markets be willing to finance a government running a deficit of 5, 6 or even 7% of GDP, or would even the mere declaration of such intent send them fleeing?

No.

We do not think the government should increase its deficit. Even if it were to find investors or some other way to finance a greater deficit, it probably couldn't rescue the economy from recession.

An anti-cyclical policy in which the government maintains a high level of spending, irrespective of its level of income, is exactly what the government adapted in 2002, with the results we saw in the dismal Central Bureau of Statistics figures this week. The economy continued to contract, and the business sector, which had lost its confidence in Israel's economic leadership, continued to cut back investments.

Genuine anti-cyclical macroeconomic policy that could shatter the negative cycle would involve the government slashing its working budget by tens of billions of shekels, and transferring budgets to investment in infrastructure and other growth-generating areas.

Therefore, as long as the government cannot or will not hack at its regular spending, anti-cyclical macroeconomic policy must remain an empty slogan designed to allow politicians to run massive deficits and defer the hard decisions for tomorrow. The problem is that it doesn't have that option any more, because tomorrow has arrived.