Israel’s economy victim of election campaign

Israeli politicians prefer to ignore the implications of two election campaigns in one year on the market and the state deficit, which could harm the country’s credit rating.

al-monitor A man stands in front of an electronic board displaying market data at the Tel Aviv Stock Exchange, in Tel Aviv, Israel, Jan. 29, 2017.  Photo by REUTERS/Baz Ratner.

Aug 8, 2019

The trade war between the United States and China escalated last week, following an announcement Aug. 1 by President Donald Trump that he would be imposing tariffs on Chinese imports, and a retaliatory decision Aug. 7 by the Chinese to stop the import of American agricultural products. Just one day before that, the United States announced that China was engaged in currency manipulation.

So far, Israel’s election campaign made no reference over this international crisis, even though it could have significant consequences for the Israeli economy. In fact, economic issues barely appear at all in the various parties’ campaigns, and if they do happen to appear, they are hidden behind an irrelevant series of personal attacks.

A quick look at the Blue and White party’s Twitter account shows that among the dozens of tweets made during the first days of August by the party that hopes to replace Prime Minister Benjamin Netanyahu and the Likud party, only one — a reaction to an article about the deficit — actually dealt with economic issues. Nor did Blue and White’s campaign videos discuss the economy, apart from a few generic statements about maintaining a responsible economy without hurting weaker sectors of the population.

The state deficit is a very serious issue. In the first seven months of this year alone, the deficit hovered around 24 billion Israeli shekels ($6.9 billion), more than twice what it was in the same period last year, when the deficit was “only” 11 billion shekels ($3.1 billion). What this means in practical terms is that it will be necessary to raise taxes or repeal tax exemptions and benefits, while at the same time implementing a series of budget cuts.

In fact, the government decided in July to cut the state budget, but this was just a minor cut of 1.15 billion shekels ($330 million) intended primarily to fund additional projects, rather than being used to cover the deficit. One of these projects was construction of the ground barrier along the border with the Gaza Strip; another was subsidizing day-care facilities.

The two election campaigns in 2019 are costing the economy half a billion shekels each, or 1 billion shekels ($287 million) in total. Of these, 195 million shekels ($56 million) are being used to fund the parties, while the Election Committee costs another 283 million shekels ($81 million). Added to this direct cost is the cost of a nationwide paid holiday for workers. According to figures provided by the Manufacturers Association of Israel, one such day is estimated to cost the private sector alone another 1.5 billion shekels ($430 million). Last month, the Manufacturers Association tried to advance a new law repealing the national holiday and replace it with paid leave for the day limited only to employees who actually choose to vote. This attempt failed.

Recently, the Manufacturers Association launched a public campaign with huge billboards featuring world leaders such as Donald Trump, German Chancellor Angela Merkel, French President Emmanuel Macron and Indian Prime Minister Narendra Modi, under the headline, “Real leaders choose industry,” but the political arena has yet to respond. The party leaders are simply ignoring it.

In a conversation with Al-Monitor, the Director General of the Manufacturers Association Robi Ginel accused Israel’s economic leadership of ignoring what is happening around the world, particularly the currency and trade war between the United States and China. “There is a leadership and decision-making vacuum,” he said. According to him, the reason that no decisions are being made is because the election campaign sucks up most of the attention of those politicians in a position to make real decisions.

A senior official in the Finance Ministry told Al-Monitor that as a result of the impending election, there have been very few economic discussions with the participation of ministers and Knesset members. “There is no way to get long-term policy decisions during an election campaign, so that all we get are temporary solutions,” he said on condition of anonymity. “We discuss the international situation and make recommendations, but only for limited gap measures.”

He noted that a long list of reforms and strategic programs have been put on hold because of the election campaign. So, for instance, the “Price for Residents” reform, intended to deal with the housing crisis, has been frozen.

The Organization for Economic Cooperation and Development’s economic outlook for Israel in 2019 shows cautious optimism, given the underlying strength of the Israeli economy. On the other hand, it also expresses concern about the growing deficit and an inadequate growth rate. According to this forecast, Israel’s government must advance structural reforms in a number of different areas, including a reduction of the economic gaps vis-a-vis the weaker groups among the population, such as the ultra-Orthodox and Arab sectors. The problem is that the current five-year plan for the Arab sector is about to end, while preparations of a follow-up plan have ground to a halt because of the election.

And there is another cost to this election. Dissolving the 21st Knesset so quickly altered the average frequency of elections since 1995 to once every 2.6 years. This is very frequent, when compared to other democratic states. A country in which democratic processes fail to result in a stable government is classified as problematic, both politically and in terms of governance. This, in turn, could harm the country’s credit rating.

It will be almost a year from the start of the election campaign for the 21st Knesset in late 2018 until the formation of a new government after this round of elections for the 22nd Knesset. The government’s economic activity throughout the course of this year has been limited, there has been no long-term planning, nor has there been any real effort to deal with strategic economic problems or crises. Given this situation, it can only be hoped that a new government will be formed quickly after these elections, and that it will wake the Israeli economy from its slumber.

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