Over the past weeks, the financial maelstrom has spilled out into the streets. Although the cottage cheese wars, the tent protests and the doctors' strike are being waged separately, they all come under the same roof: Israel's middle class, which has been worn out over the years, has had enough.
In a special interview to Calcalist held last weekend, Steinitz appeared unruffled by the protests. He prefers to stress the achievements of Israel's economy and regards its troubles as rich man's problems. Nonetheless, he is well aware of the middle class plight and pledges to move the issue to the top of his agenda.
Minister, the public protest is on your shift and is gaining momentum. Could you have perhaps done something wrong?
"Public protests in the streets does not necessarily mean that the government made a mistake. People hold protests all over the world – that's what Democracy is all about. Demonstrations in Israel are not only against the economy – they're also about left and right-wing political issues. When the government decided on the settlement freeze, droves of people took to the streets. Does that mean that the government was wrong?"
In the cottage cheese crisis, Ofra Strauss admitted that she was not in touch with "what was happening in the outside world". Being in touch with the public is all the more important when it comes to public representatives and it appears that you did not see this protest coming.
"I think that already over a year ago, we accurately identified the housing crunch as the economy's main, significant and genuine issue. We have been diligently working to deal with the matter."
'Housing problem worries me as a parent'
Since mid 2007, real estate prices have soared by an average 60%. More and more citizens in Israel, namely young people, cannot obtain what just several years ago was considered legitimate and plausible – their own apartment. "Beyond my responsibility as Minister of Finance, I am concerned over the housing crisis on a personal level as a parent," says Steinitz. "I have three kids as well, one who has just finished his army service and another who is still in the army. Looking ahead, I realize that at the current level of prices I'll find it hard to help them."
"It's important to understand that the housing crisis that is fueled by the economy's low interest rate has been unfolding over the past eight years between 2001 and 2009. In each of these years, the total number of housing units that were built and sold fell short by 5,000-6,000 units than the market's demand. This is not a problem that can be solved in one or even two years.
"The Ministry of Housing and Construction and the Ministry of Interior are doing what they can and they did make an effort – with the support of the Ministry of Finance – to increase housing from 30,000 units to nearly 40,000 units in 2010. At the same time, the prime minister is spearheading endeavors to thoroughly treat structural problems in Israel Land Administration's and the planning and construction commissions."
And this is enough to ensure Israel's citizens will be able to afford an apartment?
"Insofar as the sales of land and construction, what was achieved thus far is significant but not enough. In 2011, nearly 45,000 unites are expected to be sold, however, we estimate that Israel needs another 60,000 units.
"At a rate of 45,000 unites a year, it will take six years to close the gap. Even if we are able to attain a rate of 50,000 unites per year, we will still be three to four years behind.
So what you are you saying in fact is that there is no solution to the predicament?
"We had already begun responding to the problem. There is a certain drop in the number of required flats. At the same time, we initiated another important step: we found that there were 140,000 unoccupied flats in Israel – flats that were converted into offices or flats that were purchased for investment purposes.
"We decided to offer considerable incentives and even if only 10% of these flats are converted back into housing units, the situation will change in an instant. I estimate that we will see a slowdown in price climbs or the beginning of price drops towards the end of 2011 or the first quarter of 2012, at the latest."
What about the "Mehir La'mishtaken" tender (to subsidize flats in periphery areas for young people) that Minister Atias is promoting? He claims that the Ministry of Finance is putting a spoke in his wheel.
"I'm not rejecting his proposal out of hand; however, I do not see that it would make such a difference. If we accept the initiative we would have to add a criterion for applicants which would be military service. Once you start offering discounts the question arises who is going to benefit from them.
"Obviously the number of children in a family should not be the only criterion for these tenders so as to allow the entire population to benefit from the price drop. But have no illusions – even if several thousands of units are built as part of this initiative – this is not what will drive prices down. The actual solution is to increase construction substantially and that takes time."
'We are already on an upward curve'
Even if they are effective, the steps Steinitz described do not address the changes in the flat construction mix in Israel today. The units built today comprise almost exclusively large flats and there is no supply of new flats for those seeking 2-3 bedroom flats.
"It's true that small flats are hardly ever constructed in Israel today. To a great extent this is due to the fact that heads of municipality believe that by constructing larger flats they will attract a financially strong population that will pay high municipal taxes.
"When my wife and I were young, we lived with two children in a small 60 square-meter (645 square-feet) flat on the fourth floor with no elevator, in the Katamonim neighborhood in Jerusalem. We considered ourselves lucky and later, we moved into a better flat.
"Today it is hard to procure such flats. We are trying to encourage heads of municipalities to build small flats. There is an increase in construction of 3-4 bedroom flats but it's still not enough."
Reflecting on the past is nice; however, the economic reality has changed and so has the standard of living.
"Look, the bottom line is that not everyone can live in a penthouse in the center of Tel Aviv. Anyone who wants a larger flat with land will have to move to the peripheries; Living in Manhattan is also very expensive. That's just the way it is – you have to compromise. But that's what everybody wants and therefore the prices are so high and that is why people will eventually have to compromise.
"I would like to remind you that the previous administration was oblivious to the growing problem and in 2008, when the shortage had become a burden it ruled out selling and planning construction on ILA land in the center of Israel."
In conclusion, what is your message to the tent dwellers?
"The message to all of the citizens of Israel – those dwelling in tents, those living in one and a half bedroom flats and those living with their parents – is that we regard the housing shortage as a paramount issue and will not rest until we solve the problem. This means first and foremost, that the supply of flats must increase, and price trends must change.
"I cannot commit to deadlines but I can estimate that the shortage is beginning to abate. Assuming that the reform at ILA and the incentives for offices and unoccupied flats will pass in the Knesset – we are on our way up. I assume that we will feel the easing of prices within six months and of the financial crunch within a year. Is the worst of the crisis behind us? It is a reasonable estimate."
'In-depth analysis of middle class erosion'
Ostensibly, Israel's good macro figures – low unemployment, impressive growth in productivity, foreign investment – indicate success. Nonetheless, growing portions of Israel's society feel that they are not enjoying the fruits of this success so much so that even the mid-July heat could not keep them off the streets.
"There is a claim which I assume has some truth to it, about the erosion of the middle class over recent years and decades," says Steinitz. "This is being heard not only in Israel. Economists have been talking about the erosion of the middle class in the United States and the West since the late eighties.
"As minister of finance, I intend to seriously get to the bottom of this issue in the near future. The scope of the problem must be examined and the situation is Israel must be compared with other countries in an endeavor to find a way to deal with the problem."
If so, when will a commission be appointed to examine the status of the middle class?
"There's no need to appoint a commission for every little thing. Take the Encouragement of Capital Investments Law (ECIL) for example. This was a groundbreaking law that is already yielding results in the form of new factories that are being built in the Galilee and the Negev.
"Look at what we did in high-tech – we sat with high tech professionals for three-four months to examine the sector under the watchful eye of the media and we devised a scheme that is now playing an important part in the recovery of high-tech in Israel.
"Don’t make the common mistake of assuming that there is a large discrepancy between macro and micro figures. Macro figures are extremely pertinent to the citizens of Israel. Think what would have happened had we failed to turn the economy around, to cut unemployment to its lowest level in 25 years or had I not been able to bring back high-tech ad pharmaceuticals investments.
"What if we had 500,000 more unemployed than we have today – which was the forecast from two years ago when I came into office? What would have happened then? In such a case we would have to cut child allowances, old age pensions and the average wage would drop.
"In the US, President Obama imposed a public sector wage freeze and most European countries froze wages as well. Israel is one of the only countries in which wages climbed during the global crisis.
"No one looks at what's going on in the rest of the world and says, ' Wow! I'm not unemployed, how wonderful.' It's natural for people to have jobs. No one says, 'Wow! Europe is cutting child allowances and old age pensions and not only are my parents' pension and my own not being cut – they increased.' People don't see the full half of the glass."
You are overlooking essential figures. In 2009, some 124,000 people dropped below the poverty line and the poverty rate among working families climbed 10% while inequality continued to climb.
"According to official 2010 figures from the National Insurance Institute, poverty among the elderly population dropped thanks to the pension increase. This is the first time in years that such a decline has been recorded. I estimate that in 2011 we will see the gaps closing. We are dealing with the need to close gaps in Israel's society by means of significant initiatives among the orthodox and Arab sectors in Israel."
What about the cost of living in Israel? Why are so many products more expensive in Israel than in the US and Europe?
"There is a sense of rising prices on basic commodities such as food a toiletries. This stems from several causes one of which is the centrality and lack of competition on the Israeli market which we are dealing with through a special commission.
"There is an additional effect that is related to the recovery from the recession. In times of recession, there are forces that drive prices down; when the economy begins recovering from the recession - which we did far better then the US and Europe – there are forces that drive prices up.
"This is most prominent in currency rates, Why are the US and Europe cheaper for Israeli tourists today? Because the shekel is stronger. If things start looking up for the States and the dollar rate leaps to 4-5 shekels, things will change, in which case even the troubles of rich people – who dealt with the crisis in a satisfactory manner – will become real. Believe me, I prefer this over mass unemployment."
What do you think the solution is for the public health crisis?
"I call upon the doctors to accept arbitration proceedings. In such cases, when the matter at hand is human suffering, there is no reason to negotiate on the expense of the population. Israel's Medical Association has agreed in the past to go to arbitration. We think that the doctors have already received a considerable wage increase, and we are willing to give interns a lot more.
"One has to bear in mind that although Israel's' medical system has problems that must be solved, all in all, we have an excellent medical system as compared with OECD states and especially as compared with Israel's education system which is way behind."
Shaul Amsterdamski and Tomer Zelzer contributed to this report
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