US embassy cable - 05TELAVIV293

C O N F I D E N T I A L SECTION 01 OF 03 TEL AVIV 000293 
 
SIPDIS 
 
E.O. 12958: DECL: 01/14/2015 
TAGS: ECON, EFIN, PREL, KWBG, IS, ECONOMY AND FINANCE, GAZA DISENGAGEMENT, ISRAELI-PALESTINIAN AFFAIRS 
SUBJECT: NETANYAHU TO CODEL KYL ON ECONOMIC REFORMS, 
DISENGAGEMENT, AND PALESTINIAN ELECTIONS 
 
 
Classified By: Ambassador Daniel C. Kurtzer for reasons 1.4 (b) and (d) 
. 
 
1.  (C) Summary:  Finance Minister Binyamin Netanyahu 
outlined for CODEL Kyl and the Ambassador in a January 9 
meeting the economic reforms he has undertaken during his 
tenure.  The reforms include cutting government expenses, 
reducing taxes, privatizing some state-owned enterprises, and 
fixing the pension system.  Netanyahu explained to the CODEL 
that his strategy in pursuing reforms has been to "come 
prepared and act quickly" and to continue with other projects 
that are in the works, such as breaking the banking duopoly 
in Israel and decreasing tax rates further.  Netanyahu also 
discussed his views on the need for a national referendum to 
implement the disengagement plan, and on the Palestinian 
elections.  End summary. 
 
---------------------------- 
Netanyahu's Economic Reforms 
---------------------------- 
 
2.  (C) Finance Minister Binyamin Netanyahu on January 9 told 
CODEL Kyl and the Ambassador that two years ago, Israel was 
running a budget deficit of 7 percent of GDP, had both 
negative GDP and negative GDP per capita growth, and was on 
the verge of a financial collapse.  He said he used the 
crisis to implement an extensive program of structural 
reforms, which included cutting government spending, 
especially transfer payments; reducing taxes; and undertaking 
privatizations.  On the issue of privatizations, Netanyahu 
explained that he has been working on the ports and airlines, 
and is now also going to focus on the banking sector, noting 
that Israel Discount Bank will be sold next week.  He 
concluded that after two years of decline, the economy is 
currently growing at 4 percent. 
 
3.  (C) Netanyahu commented that he is reforming the bankrupt 
pension system.  He reported that the GOI has already taken 
the pensions from the unions through legislation, privatized 
them and committed government funds to balance them.  In 
addition, it has modestly lowered the benefits while 
increasing the contributions, and raised the retirement age 
from 60 to 64 for women, and 65 to 67 for men.  He stressed 
that while the problem of bankrupt pensions is a world-wide 
phenomenon, it must be dealt with immediately in Israel 
because Israelis on average live to 80 years of age, which he 
claimed is the second longest life expectancy in the world 
after Japan. 
 
4.  (C) In response to the CODEL's question on the public 
response to pension reform, Netanyahu responded that there 
had been a significant struggle with the labor union and that 
welfare recipients set up tent cities to protest cuts in 
their benefits, but his strategy was to "come prepared and 
act quickly."  He said it was important to "load up" the 
reforms because Israel would "get a strike anyway" so it was 
better to do them all at once.  He also explained that 
simultaneous reforms have a bigger cumulative effect on the 
economy than taking a piecemeal approach.  Netanyahu reported 
that Israelis are better off with his reforms because their 
salaries have increased, but that the media reaction has been 
mixed because unemployment stands at 10.1 percent.  He 
explained that once unemployment drops to 9 percent, the 
center of the country will feel the improvements, but Israel 
should be able to get the unemployment figure down to 5 
percent. 
 
5.  (C) Netanyahu added that he also reformed the child 
allowances system.  He said that Israel has the highest 
population growth rate of any western country, with an 
average of three children per family.  Since child 
allowances, prior to his reforms, increased with the number 
of children in the family, families had more kids and were 
thus able to "drive BMWs as their second cars."  Netanyahu 
reported that he is flattening out child allowances over time 
and that most of this change has already been implemented. 
 
-------------------- 
More Reforms to Come 
-------------------- 
 
6.  (C) In response to CODEL's question, Netanyahu said that 
the GOI plans to tackle banking sector reform next.  He 
explained that two banks handle 80 percent of the 
transactions in Israel, and that they do not provide any 
services, yet charge exorbitant fees because there is no 
competition.  He also said these banks make poor lending 
decisions, citing as an example the fact that 70 percent of 
their credit goes to the top 1 percent of their customers. 
 
7.  (C) Netanyahu explained that he would soon be going into 
wage negotiations with the port workers since the GOI is 
breaking up the ports to increase competition, and that he 
expects a strike on February 17 -- the day the Ports and 
Shipping Law goes into effect to establish four government 
companies.  He also said he wants to take on land reform and 
the Israel Lands Authority because 93 percent of the land in 
Israel is state-owned, so the remainder is very expensive for 
private owners.  Netanyahu reported that the GOI plans to 
spend a lot on infrastructure such as a railway system to run 
from the central Israel to to Eilat in the south so that 
Israel can compete with the Suez Canal for goods moving from 
Asia to Europe.  He added that he has decreased income taxes 
from 65 percent to 49 percent, but wants to move further down 
to 42 percent, and that he has decreased corporate taxes from 
36 percent to 30 percent. 
 
8.  (C) Netanyahu noted that given the current environment of 
globalization, countries should not wait to undertake 
reforms.  "Either reform now to a free market with tolerable 
costs, or wait for a tragedy."  He commented that the global 
market generates punishing competition, so outsourcing and 
privatization are the keys for governments because there are 
few functions they can do better than the private sector.  He 
explained that his philosophy is "If you can work, go to 
work.  If you can't, we'll take care of you," but that this 
can be done without a large government. 
 
---------------------- 
The Disengagement Plan 
---------------------- 
 
9.  (C) On the issue of withdrawal from the Gaza Strip, 
Netanyahu reported that the idea came about because there was 
no partner on the Palestinian side with whom to work.  He 
said Prime Minister Sharon never intended to stay in the Gaza 
Strip because "it is not useful."  Withdrawal "could not be 
for nothing," however, because terrorists would claim a 
victory over Israel as they did during the withdrawal from 
Lebanon, leading to an increase in terrorism to force GOI 
withdrawal from the entire West Bank and then from Tel Aviv. 
To balance the scales, Netanyahu suggested, the GOI should 
cordon off the Gaza Strip on all four sides because the 
Egyptians will never wage a war with Palestinian militants to 
stop smuggling and attacks on Israel.  He expressed 
satisfaction with President Bush's statement against the 
right of return and his statement that there should be 
territorial exchanges based on demographic realities. 
 
10.  (C) Netanyahu said he is concerned about the soldiers 
who are refusing to follow the government's orders on 
evacuating settlements, and described this issue as a 
"palpable threat."  He said there would not be a civil war 
over the matter, but that it is very dangerous because it 
would be difficult to implement the GOI's decision. 
According to Netanyahu, the solution is for Sharon to hold a 
referendum, even if he does not want to, because it would 
knock out the majority of the resistance to disengagement. 
 
--------------------- 
Palestinian Elections 
--------------------- 
 
11.  (C) On the Palestinian elections, Netanyahu opined that 
it is incorrect to assume that democracy begins with 
elections and that the Palestinians will be a model for the 
rest of the Arab world.  He said it is important to note what 
happens on the other side of the border, and explained that 
the Palestinians are corrupt, undemocratic, and have a bad 
education system that incites against Israel.  He recommended 
that the U.S.  encourage the Palestinians to dismantle 
terror, have transparency, and normalize their society by 
ceasing incitement.  If the Palestinians "continue to 
malfunction," Netanyahu said, there will be "no movement at 
all."  With respect to HAMAS joining the political fold, 
Netanyahu reported that "it's not going to work" and that 
HAMAS needs to be "killed."  He said the Palestinians need to 
take concrete actions, otherwise Israel will not respond. 
 
------------------------ 
Asking the U.S. for Help 
------------------------ 
 
12.  (C) Netanyahu explained that he has successfully 
decreased the budget deficit from 7 percent of GDP to 3.9 
percent of GDP, but that he expects the deficit to be 3.4 
percent of GDP this year because of the disengagement plan, 
construction of the seamline barrier, and other planned 
reforms.  In this context, he suggested that it would be 
useful for the U.S. to press the international community to 
help finance the construction of the barrier.  If the 
international community is concerned about the Palestinians' 
quality of life, it should understand that building passages 
in the barrier is expensive.  He concluded by asking for help 
with the security costs of the disengagement plan. 
 
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