- The Washington Times - Wednesday, July 22, 2009

TEL AVIV

Israeli Prime Minister Benjamin Netanyahu emphasized during February’s election campaign his record as a finance minister who pushed economic liberalization and cut taxes.

But with tax revenue down in an economy pinched by the international economic downturn, Mr. Netanyahu opted for raising taxes instead of roiling coalition partners by trimming government spending.

Mr. Netanyahu emerged from his first domestic political test by passing the budget last week.

But in doing so, he was forced to backtrack from his campaign rhetoric in order to keep his sprawling coalition intact. In the process, he exposed himself to fresh criticism as a weak-kneed political operator.

“People are not happy with him,” said Shlomo Maoz, an economist at a Tel Aviv investment house. “They don’t see a light at the end of the tunnel” on the economy.

Mr. Netanyahu, who has a master’s degree in business from the Massachusetts Institute of Technology, strikes a contrast with other Israeli prime ministers in that he talks just as passionately about liberalizing Israel’s economy as he talks about fighting terrorism or the need for Arab countries to recognize Israel as a Jewish state.

“In recent years we managed to turn around the Israeli economy and bring five years of growth. We will have to repeat this success,” he said recently.

During his first term as prime minister, he oversaw bank privatization, the move to a free-floating currency and a drop in inflation. But in a country with a collectivist political tradition, his policies are sometimes viewed as benefiting the rich at the expense of the underclass.

One of his proposed tax hikes for the just completed budget - a sales tax on fresh fruit and vegetables - failed to survive populist outrage and has been withdrawn.

Since then, he has been ridiculed with the nickname “lachitz,” revived from his first stint as prime minister in the late 1990s. The word means “pliable” in Hebrew.

A political commentator from Israel’s Channel 2 television station suggested that if Mr. Netanyahu can’t face down coalition allies just a few months after being elected, he won’t able to withstand much weightier pressure from the U.S. on the Israeli-Palestinian conflict.

Still, analysts say the inherent instability of Mr. Netanyahu’s coalition government gives him no choice but to bend to the will of his partners. Keeping everyone satisfied is difficult because Mr. Netanyahu’s coalition runs the gamut from far-right nationalist parties to the dovish Labor Party. Among the 67-member coalition that controls Israel’s 120-seat parliament, Mr. Netanyahu’s Likud Party is a minority.

“Given the nature of politics in Israel, he’s doing quite well,” said Avraham Diskin, a political science professor at Hebrew University. “It’s far from perfect. But, I could not have done better.”

Like much of the world, Israel’s economy has suffered a blow from the financial crisis, mainly because it is dependent on demand in the U.S. and Europe for its exports.

As a result, economic growth in 2009 has ground to a standstill, and unemployment is at a three-year high. An expected jump in inflation in June was blamed in part on the new taxes.

Mr. Maoz said there were higher expectations of Mr. Netanyahu because he is credited with making politically unpopular spending cuts as finance minister in 2002 to balance the government’s budget and avert a financial crisis.

By championing economic liberalization - policies such as privatization that are perceived by many as benefiting the wealthy - Mr. Netanyahu alienated some working-class Israelis who form a loyal constituency in the Likud Party.

The decision to levy new taxes has exposed Mr. Netanyahu to criticism from economic commentators. The business page of the left-leaning Ha’aretz newspaper dubbed Mr. Netanyahu a “weak prime minister.”

“The tax cuts were the flagship of Prime Minister Netanyahu,” wrote Ha’aretz economic commentator Motti Basok. “Netanyahu behaved like his biggest critics like to define him, as pliable.”

Scrapping the proposed fruit and vegetable tax was seen by analysts as a move reminiscent of Mr. Netanyahu’s first term as prime minister, when he developed a reputation as a politician who too easily abandoned principles for political convenience.

Mr. Netanyahu also has been ridiculed for undermining Finance Minster Yuval Steinitz, a loyalist who got the job despite the fact that his expertise was in national security. Many consider Mr. Netanyahu as the real finance minister.

Indeed, the major political lesson that Mr. Netanyahu is believed to have learned from his first term is the need for constant effort at coalition maintenance by keeping partners happy.

Despite disappointment over higher taxes, the prime minister continues to push an ambitious economic agenda.

He wants to enact a real estate reform that would privatize large tracts of state-owned land in a country where more than 90 percent of the real estate belongs to the government.

The reform is being sold as a way to make the real estate market run more efficiently and make more affordable housing available.

Mr. Netanyahu also envisions a rail line from Eilat to Ashdod that could transport manufactured goods that arrive in the Jordanian port of Aqaba to the southern Israel port of Ashdod for distribution to Europe. Such a link could spark economic development in Israel’s sparsely populated south.

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