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8 OBSTACLES TO GROWTH: THE ALMIGHTY WEAKLING A Summary of Government Activities In the six preceding chapters attention has been focused on the damage to the economy inflicted by excessive government involvement. In this chapter , we shall concentrate on the impact of the interventionist policies on the government itself and on its ability to function as a government. Let us first consider the role played by government relative to the GNP. In what follows, all financial magnitudes will thus be stated as percentages of the GNP. Total expenditures comprise public consumption, transfer payments, public sector investment, interest paid on the domestic debt, and net interest on foreign debt. So defined, total public expenditures exceeded 70 percent in each of the years 1980 to 1985, with the 1980 share constituting the peak at 76 percent. In the latter part of the 1980s the share has been declining steadily, standing at 55.6 percent in 1991. Taxation alone cannot finance such a rate of expenditures, but due to U.S. aid and other foreign non-debt sources, this is not really necessary. In the Lebanon War year 1982, enough foreign resources were mobilized to allow the government to facilitate the 71.5 percent of the GNP in expenditures (Table 8.1). with only 56.6 percent in domestic finance. The main source of domestic finance was a heavy tax burden, the rest carne from borrowing and income generated by government corporations and other property (e.g., revenues of the Port Authority). Although 1982 saw a huge tax burden (45.5 percent), in 1986 the tax burden was even higher, 48 percent of the GNP. Perhaps even more important are the high marginal income-tax rates. For example, in 1987 the rate for the top income bracket was 52.8 percent.1 How do Israelis cope with these heavy average and marginal tax rates? Part of the answer is provided on considering the vast transfer payments, to which we now turn. 178 The Poltical Economy ofIsrael TABLES. I Government Finances, Percent of GNP. 1982 Total Expenditures: Of which Financed by: Transfers from Abroad Foreign Borrowing Domestic Taxes Domestic Borrowing Other Composition of Expenditures: Public Consumption Direct Transfers Subsidies Debt Service 71.5 9.1 5.8 45.5 7.7 3.4 39.7 11.5 9.7 10.6 Source: BOI, Annual Report 1984, pp.88, 100; 1986, p91; 1987, p. 90; 1990, p. 164 From Table 8.1 it emerges that the govemment spent 31.8 percent of the GNP on transfer payments and debt service. Direct transfers formed 11.5 percent , including income maintenance, social security payments, unemployment benefits, and so forth; a further 5.8 percent was spent on direct subsidies, chiefly for staples and basic services (bread, milk, public transportation, etc.) and for exports; and another 3.9 percent was spent in the fonn of credit subsidies for industry, housing, and the like. Altogether, then, the govemment engaged in direct and indirect transfer payments totaling 21.2 percent. So, although the gross tax burden in 1982 was enormous, the net burden was only 24.3 percent, certainly not excessive when compared to most Westem economies. The distorting effects of the gross tax rate and the high marginal rates are not alleviated, of course, by transfer payments. But the transfers do resolve the apparent contradiction between the tax burden and the relatively high rate of private consumption. Table 8.1 also reveals a high rate of domestic borrowing. The consequences in terms of the capital and credit markets have been discussed at length. In addition, the heavy borrowing created a huge domestic national debt. In 1985 the debt burden reached a peak of 127 percent of the GNP. Things have improved a bit since then: in 1990 domestic debt was down to about 102 percent of the GNP.2 One of the chief tasks of any government is the provision of public goods. In Israel, defense occupies the lion's share of this category, so let us consider it first. Table 8.2 contains the essential information concerning the recorded defense burden. There are two sets of figures in the table: those con- Obstacles to Growth: The Almighty Weakling 179 cerning total consumption for defense, and those containing the domestic component thereof. The distinction is important because of the way in which defense imports are financed. Beginning with the 1973 Yom Kippur War, the U.S. government has been providing Israel with grants to finance defense procurement in the...


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