HAVIV RETTIG GUR
How does Israel keep functioning despite constant political turmoil? Meet the opaque group of unelected bureaucrats that the country’s politicians rely on to save it from themselves.
Amir Yaron, governor of the Bank of Israel, with Shaul Meridor, then-head of the Budgets Department, at a conference in Tel Aviv on December 31, 2019. Flash90.
In August 30, a little-known Israeli treasury official named Shaul Meridor resigned his post and sent shockwaves of anxiety through the Israeli political class. President Reuven Rivlin, whose position requires that he stay above the fray of day-to-day politics, decried the resignation as “deeply worrying,” adding:
At this time, more than at any time in the past, Israel needs a professional and robust public bureaucracy that works together with the elected echelon to save the people and the country from the serious crisis that now grips the entire world.
For a brief time the resignation led the news broadcasts. Prime Minister Benjamin Netanyahu, opposition leader Yair Lapid, Defense Minister Benny Gantz, pundits, advocates, and activists all chimed in on its significance. The governor of the Bank of Israel, Amir Yaron, tried to project calm, assuring Israelis that the country’s credit rating “doesn’t depend on a single person,” no matter how important.
It was a puzzling spectacle. Meridor is a soft-spoken and uncharismatic economist, until Sunday the head of the Finance Ministry department charged with drafting the state budget—a drab functionary whose face most Israelis only learned to recognize the day he resigned. Yet his resignation, and his accompanying condemnation of the government’s failure to pass a state budget law for 2020 and 2021, was a political earthquake. Why?
To answer this question, we first have to look at the immediate political context surrounding his resignation and then at the deeper history. For two years, the Israeli political system has been locked in a relentless, unprecedented political crisis. From the fall of 2018—when Netanyahu, faced with a governing coalition about to come apart at the seams, called for new elections—until May of this year, when the current government was sworn in, the country was led by an interim government. The elections of April and November 2019 were inconclusive, and a third election this year nearly yielded the same result. Yet despite the instability and nearly two years of lame-duck rule, most of the state’s functions carried on smoothly. Indeed, it was during the first half of 2020 that an Israel led by a limping interim government wowed the world with its early, thorough, and effective response to COVID-19.
Curiously, it was the installation of a fully-fledged government that deepened the pandemic crisis in Israel. The new government, led by the warring Netanyahu and Gantz, cannot pass a state budget, cannot appoint senior officials—Israel’s top cop, top prosecutor, the head of the prisons, even the top executive in the Prime Minister’s Office have all been serving in an “interim” capacity for the better part of two years now. The government hesitated or vacillated on crucial questions as the second wave of the virus hit. The economy is on edge as politicians flail for ways to prop it up. In short: Israel handled the crisis much better when it was in a state of political paralysis than it is doing now that it has a proper government.
A hardened cynic or committed libertarian might conclude that the Jewish state is best off without a governing coalition. A staunch right-winger might say that this is what you get when you let the center-left into the coalition; a staunch left-winger might say that Netanyahu’s many flaws have finally caught up with him. Elsewhere, I myself have argued that the current unity government, with an overabundance of ministers and Byzantine bylaws based on mutual mistrust, was bound to trip over its own feet.
These explanations may contain grains of truth, but by focusing on the elected officials and their ideologies, miss the main reason for the economic and public-health success that Israel enjoyed without a stable government: its talented, powerful, and self-perpetuating civil service, one that is largely shielded from the prevailing political headwinds. Call it Israel’s “deep state,” if you will—except this deep state hides in no shadows, is not shy about its plans and aspirations, and has lent the Jewish state a great deal of its institutional competence and stability.
Meridor is the archetypal functionary of this deep state. So too was the man behind the successful initial response to COVID-19 back in March: Moshe Bar Siman-Tov, another quiet, gray-suited economist unexpectedly thrust into the spotlight. Known to everyone as Barsi, Bar Siman-Tov was director-general of the Health Ministry at the height of the pandemic’s first wave and the only government official who scored higher in popularity surveys than Netanyahu himself. One cannot fully grasp the complex cut and thrust of Israeli public life without understanding the role of mild-mannered civil-service mandarins like Barsi and Meridor. It is no accident that Barsi had cut his teeth as a public servant in the same Budgets Department that Meridor had led, earned his economics degree at the same university, and faced down Israel’s elected politicians with the same grim determination.
This is a pivotal moment in the balance between Israel’s civil service and its elected officials, with consequences that reach into every corner of Israel’s public life. Most of Meridor’s defenders this week do not actually know the man, are not meaningfully invested in him, and certainly aren’t versed in the specifics of the feud with Finance Minister Israel Katz that drove his resignation. The same can be said of his detractors. Behind the anxiety surrounding his departure lies a broader fear that a profound crisis in Israeli public life is endangering a culture of fiscal and managerial responsibility whose determined defense has long been seen as the most vital task of Meridor’s post, a fear that the salvation the country once found in his brand of unflappable bureaucrat (more on this shortly) is threatened by the crushing pressure of the political deadlock, and a fear that the country may soon become vulnerable once more to some of the worst missteps and traumas of its short but tumultuous history.
1 The Budget Is Boss
While he was in government, Meridor was the head of the Budgets Department, an immensely powerful section of the Finance Ministry that combines the functions of the U.S. Treasury Department and the White House Office of Management and Budget and that plays a key role in the story of the rise of Israel’s powerful bureaucracy.
To understand the Budgets Department’s quiet power, it’s helpful to go back to March 2018, when the state comptroller Yosef Shapira issued a scathing report accused it of hiding public funds from politicians. The report makes for unexpectedly fascinating reading, a fiscal cloak-and-dagger thriller that showcases the strange mix of careful planning and unconstrained chaos that come together in Israel’s culture of governance.
By clever financial wizardry, Shapira explained, Israel’s state treasury has managed to buck the instructions of the Knesset and prevent government agencies from accessing taxpayer money allotted to them by law. Its tricks are numerous and often deliciously elaborate. First among them is a strategic overuse of fiscal reserves. The use of reserves is normally, of course, an entirely reasonable practice consisting of setting aside funds allotted to each ministry that cannot be used unless the need arises and they are then unfrozen by the Budgets Department and the Knesset Finance Committee. The reserve funds are a hedge against unexpected cost overruns that help ensure the government can adhere to its budget. At least, that’s what they’re supposed to be.
The 2018 report found dozens of instances in which the amount of money set aside for reserves was, as Shapira politely put it, “anomalously high.” At the Education Ministry, for example, an astonishing 53 percent of the development budget for one fiscal period was declared reserves, and thus beyond the reach of ministry officials for normal use. The development budget of the Health Ministry saw 32 percent similarly assigned. More than a fiscal hedge, more than a responsible budgeting practice, this was, Shapira concluded, an unapproved budget cut.
And it was not the only one. Year after year, across a wide array of government departments, the Finance Ministry has in this manner held billions of shekels in reserve. On paper, the money went to the right agencies, but it remained inaccessible so long as the Budgets Department didn’t agree with an agency’s spending decisions. In this way government programs ended up without the funding that lawmakers had intended for them.
Israel’s unelected bureaucrats routinely and deliberately hide away as much of the state budget as they can so that its elected politicians can’t spend it all.
The overuse of reserves was clever enough a fiscal tool. Even more clever is the treasury’s use of overbudgeting. Sometimes it assigned certain agencies more money than they could possibly spend, a practice that conveniently tied up the money where other, more profligate branches of government couldn’t get to it. Some NIS 4.1 billion from the 2014-15 budget was hidden in this fashion. And yet another bit of fiscal legerdemain—categorizing discrete entitlement spending earmarked in coalition agreements as part of a broad pool of government-wide “fiscal reserves” rather than program-specific “designated reserves,” making it harder for lawmakers to check if the money had actually been spent—explicitly violated a December 2016 cabinet decision.
These details may seem convoluted, but the upshot is mercifully straightforward: unelected bureaucrats routinely and deliberately hide away as much of the state budget as they can so that the elected politicians can’t spend it all. The unspent reserves are, after this trick is complete, simply returned to the general government accounts maintained by the office of the accountant general in the Finance Ministry.
Shapira’s report was a call for transparency, for fiscal measures to be undertaken out in the open, in collaboration with the elected Knesset, whose power of the purse is, after all, a fundamental pillar of parliamentary democracy.
Shortly after the report became public in March 2018, its chief suspect, none other than Shaul Meridor, was interviewed on a morning radio news program, where he was asked to respond to Shapira’s accusations. He denied nothing and apologized for nothing. “The ministries always want more money for more programs,” he complained, “and our job is to say what gets funding and what doesn’t, and mostly to say that there’s a [budget] framework and we have to stay inside it. Sometimes we have to be the ‘bad boy.’”
2 The Treasury Youth
The Budgets Department is indeed the “bad boy” of Israeli governance, the favorite bête noire of ministers, MKs, and activists of all stripes. Its employees call themselves “gatekeepers” and the “Sayeret Matkal of the public service,” in reference to the IDF’s most storied and elite special-operations unit.
The so-called n’arey ha-otsar, or “treasury youth,” are, as the name implies, young, generally beginning their careers in the Budgets Department as junior staffers in their mid-twenties. After obtaining senior positions by their mid-forties (Meridor is forty-four, Barsi forty-three), they usually go on to lucrative careers in the private sector. They’re mostly educated at the same place, Hebrew University’s economics department. By reputation, it is one of the country’s finest, responsible for training Israel’s leading economists, including the Nobel winner Daniel Kahneman. Another Nobel winner, Israel (a/k/a Robert) Aumann did his groundbreaking game-theory research there. Of the students it attracts, many intend to pursue civil-service careers, and when they do they arrive in the halls of government imbued with the principles of fiscal responsibility, a belief in the free market—and an abiding distrust in the ability of politicians to manage the public’s finances.
Staffers may be Ashkenazi or Mizraḥi, hail from a kibbutz, a small conservative West Bank settlement, or a big liberal city like Tel Aviv—but they all somehow end up believing the same things.
The Budgets Department functions as a kind of meritocratic home base for the bureaucracy at large. The treasury youth is self-sustaining, with new recruits mostly brought in by current staffers. And it possesses a kind of self-selecting uniformity. Staffers may be Ashkenazi or Mizraḥi, hail from a kibbutz, a small conservative West Bank settlement, or a big liberal city like Tel Aviv—but they somehow always possess the same quiet demeanor, the same muted style of dress, and the same basic convictions about economic policy and the foolhardiness of politicians. The small number of ḥaredi and Arab staffers has been noted by ministry officials, and an effort is underway to hire from those minority communities. But it’s safe to assume increased diversity of background won’t change the department’s underlying culture or policy commitments.
If all of that sounds familiar, it should. It is the same self-regard and swagger—and the same knack for self-perpetuation—found in the legal wings of Israeli government ministries and in the country’s famously overweening judiciary. Critics of Israel’s judiciary depict it as the last bastion of Ashkenazi privilege, but that conventional view can’t account for the strange way that Mizraḥi Jews and Arabs have entered the judiciary in growing numbers over the years and adopted its practices and views with gusto.
The power of the bureaucracy is a basic truth of Israeli life across state institutions, from the treasury to the judiciary to the military to the zoning commissions of the Interior Ministry. To understand how the Jewish state really functions one must dig down to the vocational culture and institutional history that forged that bureaucracy. The elite civil servants in the Budgets Department see themselves as the nation’s first line of defense against—well, against itself.
The women and men who work there are convinced of this. It is the first thing taught to new recruits and the last thing outgoing officials tell their replacements at their farewell parties. Officials there believe that even when they hide the public’s money from elected representatives, they are doing so at the public’s behest.
And they have a point.
Israel’s early nation-building years witnessed astounding military, economic, and social achievements that probably could not have been achieved without centralized planning. Industries were established, militias fielded, villages and towns formed, all usually by the orders and exertions of leaders of the Yishuv at their Tel Aviv headquarters.
Then, in 1977, for the first time since the state’s founding, the main left-wing party, known at the time as the Ma’arakh (“Alignment”) and today as Labor, finally lost an election. It was a watershed moment for the country, marking a shift not only from socialist Laborites to conservative Likudniks but from an old, entrenched elite to new identities and ideas that had begun to take root in the Israeli public consciousness.
It is hard to convey the breadth and scope of Labor’s control of the country at the time. It had spent decades installing its apparatchiks at every layer of Israeli public and economic life, controlling the powerful unions and even appointing the CEOs of major industries (themselves government-controlled). Labor was, in other words, powerful enough that even in opposition it could still play spoiler to the early attempts at economic liberalization that followed the 1977 election.
That election came in the midst of an ongoing economic crisis. The fallout from the 1973 Yom Kippur War and the ensuing Arab oil boycott had slashed economic growth and brought about massive inflation. And so the new Likud Prime Minister Menachem Begin appointed a politician named Simḥa Erlich to the post of finance minister and charged him with defusing the crisis.
Erlich believed the core problem was with the overly centralized economy that 29 years of Labor rule had built. In one of the first official statements of a non-Labor economic policy Israel had ever known, Erlich, satirizing left-wing manifestos, promised to “liberate” the Israeli economy “from the chains of socialism.” He had brought with him a new view of the government’s role in the economy, moving away from state control and toward something more like the American model of a regulated free market, grounded in a commitment to fiscal restraint and economic freedom.
But Erlich, and the “Liberal” faction within Likud that he led, may not have appreciated the enormity of the change that he was attempting to bring to Israeli society. Socialism in Israel’s early years was no mere economic theory. It was a way of life, even a set of assumptions deeply intertwined with what it meant to be Israeli. It was, to borrow an imperfect analogy, what the Puritan work ethic would become to the later culture and identity of Americans.
The early 1980s marked a new era of Israeli history, one in which a regional superpower that had defeated in battle its external foes suddenly discovered it had become its own worst enemy.
Today few Israelis now pine for the old socialist poverty, but the ideals of solidarity, egalitarianism, frugality, and sacrifice that accompanied it, and helped steer a young nation through times of scarcity and war, still hold a moral mystique for many Israelis, even on the political right. The inspiring sacrifices and astonishing successes that socialist Israel could deliver are undeniable, and the atrophying of the socialist elite and the later unsuitability of its economic ideas to the needs of the more developed, populous, and sophisticated country of the late 1970s and early 1980s have not diminished that aura.
By the time Erlich became finance minister in 1977, even leaders on the farthest left had conceded that capitalism wasn’t going anywhere, despite their most fervent expectations. Yet Erlich found he must still do battle with the cultural legacy and assumptions left behind by those old loyalties. Then, too, the political right of 1977 wasn’t the right of today. While the left was united around socialism, the Likud comprised multiple factions endorsing a variety of economic views. When the chips were down, Begin offered little support to the struggling Erlich, refused to cut spending, as Erlich desired, and permitted the government to borrow with abandon in order to finance that spending.
So while Erlich could craft a free-market monetary policy, hoping the Israeli lira would reach equilibrium and bring stability to the country’s trade and currency balances, his administration failed to deliver reforms of real consequence, in the end contributing to distrust in the currency and to ever-greater inflation. Erlich finally resigned near the end of 1979 as inflation soared to an unprecedented 111 percent. In 1980 Israel would jettison the lira, replacing it with the shekel and launching a program of privatization of government-owned companies—in part to liberalize the economy, in part because those companies remained bases of Labor power.
The dual effects of Labor’s chokehold and the Begin government’s bungled, piecemeal attempts at reform made everything worse—spectacularly so. The early 1980s marked a new era of Israeli history, one in which a regional superpower that had defeated in battle its external foes suddenly discovered it had become its own worst enemy.
Inflation figures for those years are staggering. Consider the lives of an ordinary shopkeeper or teacher trying to raise a family in an economy described by such numbers. The newly established shekel did little to help. The first years of the 1980s saw inflation rates of 133, 101, 132, and 191 percent, followed by a whopping 445 percent in 1984, and then, in 1985, only because of the introduction of the New Israeli Shekel, a mere 185 percent. Begin would go through four finance ministers in six years, each facing a state treasury and a national economy ever more in the red.
The point of this brief foray into an often overlooked chapter of Israeli history—a rude awakening from the heroic and simpler stories of Israel’s early nation-building and war-fighting period—is to convey the experience of despair and palpable fear for the nation’s wellbeing that was the crucible in which the culture of the “treasury youth” was formed.
Unaware that three decades later their country would achieve iconic status as the “start-up nation,” Israelis living in 1984—witnessing the incompetence and venality of their elites on left and right alike, watching the cost of bread tick inexorably upwards with each morning’s glance in the grocery-store window—reasonably wondered if the Jewish state had a future at all. Could an Israel saddled with a Venezuela-style economy long survive in the Middle East, they worried. How long before its internal weaknesses cannibalized the nation’s resilience and military strength?
4 A Sheet of Yellow Paper
It was in the middle of this ongoing national crisis that the 1984 election was held, resulting in a national-unity government with a rotation agreement between Labor’s Shimon Peres and Likud’s Yitzḥak Shamir. Peres had the first round in the premiership, with Shamir as foreign minister. Likud got the Finance Ministry. This time it was Yitzḥak Modai, a former IDF lieutenant-colonel and a businessman who had managed a cosmetics factory for sixteen years, who stormed into the ministry’s offices eager to fix what was broken.
When Modai assumed his post, inflation was well over 400 percent. But the scale of the crisis was an advantage. The emergency punched through the fog of political infighting and focused the minds of Likudniks and Laborites alike on the problem at hand.
The scale of the crisis was an advantage. The emergency punched through the fog of political infighting and focused the minds of Likudniks and Laborites alike on the problem at hand.
Modai and Peres together crafted the economic stabilization plan of 1985 that cut spending, raised taxes, got buy-in from the major industries to freeze prices, and obtained the agreement of the mighty Histadrut federation of labor unions to a freeze in salaries. The old shekel was replaced with the new shekel by the blunt method of slicing three zeroes off its value. (Modai would later title his memoir of that dramatic time Erasing Zeroes.) The reforms were deliberately designed to limit the maneuvering room of the politicians, as when the Bank of Israel Law was amended that year to make it illegal for Israel’s central bank to provide loans to the government to finance the deficit.
Two American Jewish economists played unexpectedly pivotal roles in these events: Herb Stein, a former chair of the White House Council of Economic Advisers under Nixon, and then-MIT professor (and later governor of the Bank of Israel) Stanley Fischer. The U.S. State Department had dispatched them to advise Israeli officials on how to get their house in order—and if need be, to prod them to do so. Even in the most dire stage of the crisis in 1985, Israeli leaders were still loath to undertake a program that, in Fischer’s words, “promised pain before gain,” and it was Stein’s counsel that helped to spark a serious public debate among Israelis, ensured crucial U.S. financial backing, and ultimately spurred Israel’s leadership into action. As Fischer related in a 2001 speech, a historic sheet of yellow paper was involved:
Herb and I were sent to Jerusalem in March 1985, to see if we could firm up what needed to be done. We spent several days talking to government officials, the secretary general of the Histadrut, private businessmen, and academic economists, and a good deal of time in discussions with Emanuel Sharon, director general of the Israeli treasury, who was doing everything he could to move the Israeli government to take the necessary measures.
At the end of the visit, Herb pulled out of his pocket a ten-point stabilization plan that he had jotted down on a sheet of yellow paper. The ten points were the essential elements of a stabilization program, even though they were incomplete, for instance in not sufficiently emphasizing the need for fiscal consolidation. The idea was for Sharon to take the plan up privately with the prime minister and the finance minister.
No sooner had we returned to the U.S. than the list was leaked and published in the Israeli newspapers, under the title “Herb’s Ten Points.” The fact that they then appeared in the newspapers under that heading conveyed an unfortunate impression that they were being imposed on the Israelis, which contributed to an initially hostile press reaction. . . . But, as it turned out, the leak ended up being helpful. The points were widely discussed, their shortcomings—particularly in underemphasizing the need for fiscal balance—identified, and the increased public understanding probably strengthened the government’s willingness to act.
The plan worked. By 1986, inflation was down to 20 percent and headed for a long slog back toward the single digits, which would become the norm in the 1990s. Modai’s plan was the turning point, when Israel finally escaped the catastrophic stranglehold of old ideologies and loyalties toward a more open, and more responsible, governance culture.
It was in the midst of carrying out this program, and in the post-traumatic shadow of the recent crisis, that the culture of the treasury youth began to coalesce. The Budgets Department was founded in the 1950s—during the old days of Labor dominance—but from 1985 onward this band of unassuming accountants would transform themselves into arguably the most powerful, disciplined, and aggressive source of Israeli domestic policy. And as it grew, the department proudly carried the banner of fiscal discipline and responsible planning, regarded itself as the country’s salvation and its last line of defense against the imprudence of elected politicians, and set about expanding its reach far beyond the confines of the Finance Ministry.
Their plan worked. Thus Meridor, who began his career in the Budgets Department, spent 2015 to 2017 as director general of the Energy Ministry before returning to the Finance Ministry to head the department. And Barsi, who also began his career in the Budgets Department, was soon dispatched to the National Insurance Institute to lead policy teams on health and welfare issues, then returned to the Budgets Department to become one of its deputy directors, and then was sent out again to serve as director general of the Health Ministry. Likewise the current director general of the Finance Ministry, Keren Terner Eyal, Hebrew University-educated and forty-one years old, began her career working on infrastructure budgets in the Budgets Department, then moved to the Transportation Ministry, rising quickly in its ranks to serve as director general, and then returned to the Finance Ministry as its top executive. In the last government, at least five directors general of significant ministries were former Budgets Department staffers.
5 The Youth Take Control
As the new department forged new standards, commitments, and institutional culture, it crafted new tools to impose them on other, often-unwilling bureaus and departments of the civil service, and then on an even more unwilling political class. The most powerful of these tools was the awkwardly named Ḥok ha-Hesderim, or arrangements law, first drafted by Modai in 1985. Now, a new arrangements law is passed with each state budget; invariably, it contains a vast and complicated laundry list of institutional and policy changes required to make the budget law’s math work. Like any other law, it is voted on the by the Knesset, but its individual articles are drafted by the Budgets Department—that is, it effectively allows unelected treasury officials to legislate.
By design, the arrangements law is famously hard to read for anyone not part of the treasury staff that wrote it. Of course, the Knesset could in theory vote against it, but in practice doing so isn’t an option; failure to pass the law means the budget itself cannot pass, and under Israel’s de-facto constitution (known as the Basic Laws), failure to pass a budget forces new elections. Any MK who wishes to influence or remove a stipulation contained in the law must do so in the committee amendment process, where he or she inevitably encounters Budgets Department staffers who deftly and, without breaking their characteristically quiet cadence, vociferously argue against making any changes. In a desperate effort to fight back against the law, the former Labor party leader Shelly Yachimovich, an outspoken socialist, used to put the bill online to crowdsource her reading of it.
The arrangements law was the first effort to strengthen the bureaucracy at the expense of the politicians. What’s called the “Numerator” is the most recent.
The arrangements law was the first such effort to strengthen the bureaucracy at the expense of the politicians. The “Numerator” is the most recent. Created in 2016 and championed by then-director general of the Prime Minister’s Office Eli Groner, the Numerator is a computer program that the Budgets Department uses to track all government income and expenditures three years in advance. The program tracks the government’s multi-year commitments, the expected growth in expenditures across the board, from new children born to retirees about to start collecting their pensions, from rising infrastructure costs to tax incomes and debt obligations, and anything else treasury officials can track. Its purpose: to give easy, blunt answers as to whether the state can afford a politician’s new scheme or initiative.
But the Numerator doesn’t just mechanistically spit out projections—it shapes them. Any new funds that lawmakers want to spend midway through a two-year budget cycle must, according to the implacable wisdom of the Numerator, come from cuts somewhere else in the system. As the socialist Davar website complained in June 2017, “the important decisions in our lives are being made by a robot that’s gotten out of control.”
If most Israelis don’t see things that way, it’s because in 1985 they discovered two vital and heartening truths about themselves. First, despite the long history of Israeli political movements declaring fealty to various economic ideologies, Israeli politics are not divided by economic doctrine. It wasn’t fidelity to socialism that prevented desperately needed reform, but partisan polarization. Second, though Israel’s leaders are as capable as any other nation’s of walking blindly to the precipice of collapse, they would not take that final step over the edge. They reversed course, found common ground, and set about constructing institutions to avert such emergencies in the future.
Thus it is that the unelected bureaucrat Shaul Meridor can casually explain on national radio that his job is to tell elected politicians “what gets [funding] and what doesn’t,” or “to say that there’s a framework and we have to stay inside it,” whatever the Knesset may think. He understands himself to be speaking to the present moment from the yawning emergency of the 1980s, a threat that endangered the nation as few outside enemies could. He is channeling not the over-powerful bureaucrats of a dictatorship, as politicians sometimes charge, but a modesty and restraint that sets limits on populist backbenchers and grandstanding ministers alike.
The 1980s taught Israelis, rightly or wrongly, that the economy should not be the subject of ideological contest, that old socialists soon grow more interested in protecting their own privileges than the rights of workers, and that overconfident liberalizers are capable of reforms so ham-fisted that they can deliver worse results than the preexisting inefficiencies they sought to solve. Let the benevolent philosopher-kings of the Budgets Department run things, goes the attitude, and let everyone else, secure in the knowledge that there’s an adult in the room, posture and whine to their hearts’ content.
After all, say treasury officials, it was only the concerted pressure from the Finance Ministry over many years, across governments and over several generations of Budgets Department officials, that painstakingly drove Israel’s sovereign debt down from 93 percent of the GDP in 2003 to 59.9 percent last year, lower than the U.S. (106.9 percent), Britain (85.9 percent), and even famously responsible Germany (61.9 percent).
This is no abstract achievement. As Israel’s economy now reels from the effects of the coronavirus pandemic, and may yet shrink by a once unimaginable 10 percent by the end of the year, it was the sacrifices forced on the state by that implacable bureaucracy years ago that now grant Israel the financial breathing room to borrow whatever it needs to maintain its defense posture, expand its healthcare system, and fund a swelling but ultimately temporary deficit increase to ensure Israeli businesses and households weather the crisis intact.
6 “Everyone Knows the Budgets Department Won’t Let it Happen”
There is a valuable debate to be had about Israeli governance beyond the usual bickering between politicians and treasury youth. Is it really wise that fundamental questions that in most democratic countries are considered the heart and soul of politics—economic policy, welfare, taxation, healthcare, and defense spending—are almost wholly reserved for a class of unelected bureaucrats?
Similar questions could be posed across the span of Israeli officialdom. It’s no accident that the rise, beginning in 1985, of the treasury youth culture anticipated the rise, beginning in 1992, of Aharon Barak’s “constitutional revolution,” which not only claimed the judiciary’s effective supremacy over the other branches, but spawned a similarly self-perpetuating juridical elite with extensive power throughout the executive branch. Habits of mind leap easily across institutional lines, and these government lawyers and economists, and other similar bureaucrats, borrow a sense of their social function from each other.
Like any self-proclaimed elite dedicated to public service, Israel’s elite bureaucrats have begun to exhibit signs of hubris. As the Roman aristocracy once prided itself on the fact that its members fought and died in battle alongside the plebeians—and thought that fact entitled them to their privileges—so a twenty-eight-year-old Israeli healthcare-budget planner believes his sacrifice of a higher salary in the private sector serves as proof that his public service is a calling. It is a self-perception responsible for the bureaucracy’s strengths as well as for some of its more troubling habits, like the way it treats the elected political class with disdain.
No political reporter who has wandered the Knesset’s halls over the past three decades could avoid hearing from politicians that the Budgets Department was “controlling” and “too powerful.” This writer’s very first interview of a politician, conducted in 2006 with the thoughtful and soft-spoken (and decidedly left-wing) Michael Melchior, then the chairman of the Knesset Education Committee, included the complaint that “you can’t move a secretary from one office to another nowadays without the treasury youth giving the okay.”
But then, invariably, comes the second insight, which I first heard in a later interview with a politician from the right: we shouldn’t worry about a particular candidate’s irresponsible campaign promise or populist generosity with the public’s money because “everyone knows the Budgets Department won’t let it happen.”
Why make decisions, why risk being blamed for failure, when someone else, someone better trained and more confident, will gladly shoulder those burdens for you?
Almost the same words are employed by right-wing lawmakers posturing over the “tyrannical” High Court of Justice. Like every Israeli political journalist, this writer has repeatedly sat through meetings with Israeli politicians, even cabinet ministers, who, when challenged about some especially unwise bill they have proposed, smile a rascally smile and assure the journalist that the High Court won’t let their legislation advance—which is why they advanced it in the first place. Thousands of bills are proposed in the Knesset in a normal year—the most in the world, according to one study—but not because their proponents seek to pass them into law. Instead, the bills serve as glorified press releases, declarations of intent and emotion to one’s political base.
That irresponsibility has grown into a habit, and the habit has had the effect of deforming and trivializing Israeli domestic politics. Look at things lately. In the midst of the most severe health crisis in Israel’s history, the country’s health minister was nowhere to be found. Yaakov Litzman allowed himself to miss cabinet meetings about the virus in the critical months of March and April. At the same time, then-Finance Minister Moshe Kaḥlon was absent from key meetings on the developing economic crisis. Both ministers knew—and Israelis knew too—that their ministries’ directors general, the quietly competent Barsi and Shai Babad, respectively, would hold the fort in their stead. Why make decisions, why risk being blamed for failure, when someone else, someone better trained and more confident, will gladly shoulder those burdens for you?
In other words, a managerial elite that has spent the better part of four decades telling itself the nation’s politicians can’t be trusted has helped produce a political class so irresponsible that, indeed, it often cannot be trusted. That may be too harsh. But is it any surprise that decades of relying on unelected officials have atrophied the capacities of political self-government?
All of which brings us back to Shaul Meridor’s startling resignation, and the anxieties it awakened in Israel’s body politic. That anxiety has little to do with Meridor himself. It’s about Netanyahu.
7 Netanyahu Turns Against His Bureaucracy
In mid-July, facing a public outcry over what most Israelis saw as the mishandling of the second wave of the pandemic, Netanyahu announced that the government would be sending all Israelis checks. The plan, which would cost 6 billion shekels, was criticized by many, but by none more effectively than Meridor, who quietly—though not so quietly that it didn’t reach the media—voiced his concern that a government facing a runaway deficit and an as-yet poorly understood economic crisis should not be handing out checks in response to declining poll numbers. No staff work was done to think through what Netanyahu took to calling a “stimulus” measure. No plans were put to paper; neither the Numerator nor the budget planners were consulted.
The response to Meridor from Netanyahu’s political allies was furious. “For clerks to try to control the state against the wishes of the elected leaders is anti-democratic,” Likud MK Shlomo Kari declared. “Terrorists,” pronounced Netanyahu’s ill-tempered son Yair, who accused Meridor of trying “to incite the people” against his father.
Both Karhi and the younger Netanyahu are generally viewed as convenient foils for the prime minister, sent out to establish the belligerent edge of the discourse so he himself can enter the ensuing fray as a voice of reason. Their rhetoric is, in other words, a signal from him, even if not a sign of his actual policy views or specific decisions. As such, these vociferous statements marked a startling pivot for Netanyahu, and a sign for many of his closest aides—and for the Budgets Department staffers who suddenly found themselves on the business end of Likud’s new survival tactic of uninhibited vilification—that something fundamental was changing for Israel’s longest-serving prime minister.
Netanyahu has for years been among the greatest champions in Israeli public life of the economic ethos of fiscal responsibility and free markets. Is he still?
Netanyahu has for years been among the greatest champions in Israeli public life of the economic ethos of fiscal responsibility and free markets. In 1996, during his first term as premier, he took the dramatic step of lifting the onerous currency controls that blocked foreign investment in the Israeli economy, a step that played a vital role in Israel’s emergence as a high-tech powerhouse. That act alone would be enough to grant him pride of place in the pantheon of Israeli economic reformers who helped bring about the Jewish state’s present prosperity. Then, as finance minister in the early 2000s, he pushed through a series of painful but—so most Israelis now believe—necessary budget cuts that helped guide the Israeli economy out of the second intifada-instigated downturn.
But in the months since he formed the new unity government, that old Netanyahu is growing increasingly hard to find. That’s not an observation made only by the left. Right-wingers from Naftali Bennett of the Yamina party to analysts at influential conservative think tanks like the Kohelet Forum have noted the change and wondered at its ramifications.
Netanyahu now refuses to advance a budget law not because he disagrees with his coalition partners about budgetary priorities, but because failure to pass a budget by year’s end gives him an escape hatch to early elections—with which he could avoid handing over the premiership to his rival-cum-coalition partner Benny Gantz. It is hard to overstate how irresponsible this is. In the midst of the coronavirus pandemic and an excruciating economic downturn that has driven record unemployment levels and left no Israeli household unscathed, Netanyahu has forced the government to run on an endless series of stopgap funding bills while Israel’s weakest and most vulnerable fall through the cracks.
Thus on August 27, four days before the start of the new school year, a vote to grant the education system 1.75 billion shekels for pandemic-related expenses that would enable schools to open more safely failed to pass because MKs simply forgot to show up. In the absence of a comprehensive state budget, money no longer flows automatically, and simple administrative errors can mean billions of shekels withheld from institutions and communities. The Knesset has spent the better part of the past month approving piecemeal special allocations—3.3 billion for the army, 4.2 billion for the school system, 6 billion for Netanyahu’s “stimulus” checks, and so forth—without any centralized planning or interagency staff work of any kind. In the case of the school-funding bill, the coalition chairman MK Miki Zohar’s office simply forgot to schedule the vote in the hours leading into the beginning of a ten-day parliamentary recess. It was a simple scheduling mistake—and it forced the shuttering of the largest tutoring program for at-risk Ethiopian students in the country, with its teachers suspended without pay for September and some 5,000 students left without tutors as classes got underway. Dozens more programs were affected, most of them serving Israel’s most disadvantaged communities.
After the dust-up with Netanyahu and his associates last month, Meridor remained stubbornly critical of this new way of doing things. “We won’t stop voicing our views, even if they”—the politicians—“don’t like to hear it,” he said. He warned that the new generosity with the public’s money risked politicizing coronavirus aid—and thus undermining the government’s ability to make painful demands of Israelis down the road. If there’s always money to be had, what right would the government have to demand austerity in a few months’ time? The public’s trust “is something that takes a long time to build, and is destroyed pretty quickly,” Meridor cautioned.
Then, on August 30, he resigned. He wasn’t alone. One of his deputies had already resigned a month earlier. Israel’s accountant general, another influential overseer of the public purse, announced he would leave in October, with officials close to him explaining that he was frustrated by the failure to pass a state budget and feared Israel’s credit rating might drop by year’s end. Keren Terner Eyal, the treasury’s top executive, came close to resigning last month after Finance Minister Katz scolded her for publicly defending Budgets Department staffers against some of the more egregious invective hurled at them by politicians in recent weeks.
All this means that the Israeli state may be shifting away from the institutions that helped pull it out of a cataclysmic economic tailspin some four decades ago, and dragged it, often kicking and screaming, into prosperity. If that’s true, then what is the state shifting toward?
In his resignation letter, Meridor warned that Israelis “will pay a heavy price in the coming years” for the government’s “poor conduct in recent months.” Budget decisions were being made for “narrow interests” and showed “blatant contempt for staff work,” he warned:
Just in the last few days we’ve seen ever more red lines shattered, including elementary rules of correct budgetary and economic policy. . . . The question isn’t whether it’s right to spend significant sums to deal with the coronavirus and to stimulate the economy. Everyone understands that the budget expenditures must be increased significantly during the coronavirus period. . . . This is about the decision-making process, the lack of binding frameworks, the lack of a substantive discussion on the scope of the budget, on priorities, and on the economic consequences of the [amounts beings spent].
The very fact that the pandemic would require massive spending meant the country could ill afford to detach that spending from serious fiscal planning and smart economic policy. It was a letter calculated to speak directly to the Israeli brain stem, to the old anxieties of inflation and out of control spending. It was precisely the sort of warning that would make President Rivlin conclude he could not in good conscience stay silent.
Netanyahu, of course, understood perfectly the subtext of Meridor’s criticism. At an August 31 press conference, a reporter asked him about Meridor’s claim in the resignation letter that he’d been asked to “change fiscal assessments” in order to create “fictional” money the government could start spending. Netanyahu didn’t respond directly to the accusation but drew on his own long history as a fiscal conservative. His comments are as startling as they are troubling. “Israel would be a third-world country,” he said, if he hadn’t lifted the currency controls in the 1990s—a move opposed at the time by then-Finance Minister Dan Meridor, he noted pointedly. Dan Meridor is Shaul’s father; Netanyahu didn’t say it outright, but let hang in the air the suggestion that old family loyalties lay behind Meridor’s critique rather than the unprecedented refusal to pass a state budget and adhere to it. As in the past, “so today, the question is who decides,” Netanyahu went on. “Is it the clerks or the elected government?”
Those who pay attention to such things on both left and right were not comforted by this response. No one doubts that the politicians have the constitutional right to act irresponsibly. In refusing to say he would advance a state budget, Netanyahu sent a clear message that he had no intention of doing so as long as it narrows his political options. To Meridor’s concerns he offered an unpleasant answer that boiled down to an argument that Israel’s economy is in good enough shape to withstand the chaos he is forcing upon it. Or, in an even more unvarnished paraphrase, Netanyahu said that he delivered Israel’s economy out of its third-world condition, and so now it can repay him by suffering through the political maneuvers he needs to stay in power.
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It’s not just that Netanyahu is wrong about the “third-world” Israel he supposedly found when he came into office—Israel’s GDP per capita in 1996 was over $19,000, higher than New Zealand’s—but that he increasingly talks as though his past public service now entitles him to play fast and loose with the Israeli economy. Something has clearly changed in him. Will it change further?
There are plenty of reasons to criticize Israel’s powerful fiscal bureaucracy. But those who wish to take back some of its power must show an Israeli public shaped by the devastating consequences of reckless populism that they are up to the task. It isn’t enough to chafe at the treasury’s fiscal straitjacket or to bludgeon the treasury youth as though they are the cause of the government’s incoherent response to the present emergency. Israel’s leaders in the dark days of the 1980s were neither stupid nor wicked; they were trapped—trapped by a self-destructive politics that put institutional and personal ambition above the nation’s wellbeing. That is just the sort of politics, one might suggest, on display today as MKs bicker and posture and consistently fail to do their duty as the virus’s second wave overtakes an already battered nation.
All societies develop an equilibrium of powers through the gradual accumulation of experience and circumstance. The American presidency is more powerful than its founders planned, and Congress much weaker. No one could properly understand contemporary America without understanding this fact. Students of contemporary Israel need to see how its civil service relates to its democratically elected officials. If Israel’s politicians are not up to this moment, then the treasury youth, arrogant and overweening as their critics claim, are—perhaps unfortunately—as indispensable as ever.