Israel Pulse

Israel’s economy victim of political gridlock

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Article Summary
Without a new state budget, without new senior officials and without new reforms, Israel’s economy is one of the biggest victims of the current political chaos.

At the government meeting Jan. 12, it was hard to ignore the contradiction between the statements of Prime Minister Benjamin Netanyahu and Finance Minister Moshe Kahlon regarding the economic achievements and might of the state, and the pessimistic picture presented by senior Finance Ministry officials regarding an expected growth of 4.2% in the deficit in 2021, and the need for concrete and immediate steps to address it.

One of the ministers who participated in the meeting told the financial paper Globes anonymously, “The fact that we are in an ongoing election period makes the ministers almost like extras in a play … we don’t have tools to address the problems, especially the deficit. We all know that this problem will likely be addressed by a government with a different composition, perhaps completely different, and so there's no real use of talking about it now.” 

The financial indexes of the State of Israel are not only negative, since Israel shows economic stability, low unemployment and good capacity to raise capital in the global markets. However, the Finance Ministry officials presented some troublesome figures at the meeting, chief of which is a decrease in state revenue from taxes and an increase in government spending during the election year. During the meeting, Netanyahu cut off the Finance Ministry speakers and argued that their forecast is not well established, since it is not clear what government would be formed following the election and what it could do in the next year. 

After the meeting, one of the senior Finance Ministry officials told Al-Monitor that their forecast was actually conservative, in light of the political dead end expected even after the March 2 election. As we know, Israel has been in an election mode for more than a year. The direct significance of this is that the government is paralyzed and cannot move processes, plans or new reforms, but can only continue implementing the policy set in December 2018. 

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The examples for this are many. Al-Monitor reported Dec. 13 on the budget to "rehabilitate" female sex workers, which have been stuck because of the caretaker government’s inability to move forward and the paralysis of the Knesset. Another example is the five-year plan for the Druze and Circassian societies that ended in December. The plan brought real change to these communities, for example, in good results in high school matriculation exams. Six months ago, leaders of these groups appealed to government offices to advance a new plan. While the basis for this new plan exists, because of the political paralysis and the fact that this is a plan costing 4.5 billion Israeli shekels ($1.3 billion), the relevant ministers did not discuss it and did not present it for authorization by the government. The leaders of Druze local authorities threatened a strike, and only then did the government authorize a temporary budget of 250 million shekels ($72 million) that were cut from other places. The sum hardly covers the continuation of existing projects. 

A similar fate is expected for the five-year plan for the Arab communities that is due to expire this year, which also yielded great accomplishments. A continuation plan is necessary here too, but in the meantime, no one has started working on it because there is no such direction from the ministers responsible. 

Other problems of the political paralysis are in senior appointments. The Israeli police hasn’t had a permanent chief since Commissioner Roni Alsheikh finished his term in December 2018. Because of the election cycle Attorney General Avichai Mandelblit forbade appointing a permanent commissioner, and since then Deputy Commissioner Motti Cohen has been filling the role. Likewise, the appointment of the chief of prison services and the appointment of the chief of fire and rescue services have been stalled. 

In the Justice Ministry this paralysis has caused conflict between appointed Minister Amir Ohana and the attorney general. After State Prosecutor Shai Nitzan finished his term, Ohana tried to appoint Orly Ben-Ari Ginzberg as an interim, but the attorney general, with backing from the High Court, determined that a minister in a transition government must obtain his consent for such an appointment. 

Back to the economy. The foundational problem with a lack of a government that has received the faith of the Knesset in a confidence vote is a lack of an ability to prepare and authorize a new state budget for 2020 — in the government and the Knesset. Such a budget includes reforms and changes that are needed to achieve a balanced budget and implement government policy in various areas. The Finance Ministry has prepared such a basic budget, but the political dead end has prevented its discussion and authorization. 

At this interim government stage, the ministries are instructed to work according to the same framework of the 2019 budget, adjusted for an increase in the consumer price index. The law determines that in such an interim situation, the Finance Ministry is charged with monitoring government expenses. The significance is the full control of bureaucrats, headed by the ministry’s accountant general and the person who directs the budgets of government activity. The director of a government ministry told Al-Monitor that in this situation the professional bureaucrats do not have to put up with political dictates, but on the other hand, they do not have an ability to advance new issues or urgent reforms.

The Finance Ministry claims that because there is no authorized state budget and no ability to implement reforms, the budget deficit in 2021 will reach 30 billion shekels ($8.7 billion), which is 4.2% of the total budget. This is a relatively high rate for Israel, which in recent years has enjoyed a low deficit (around 2% a year) and good growth. The Finance Ministry’s plan includes far-reaching steps, such as canceling tax exemptions and budget cuts, or else this deficit will continue to grow. But until a new government is formed there is no possibility of making such decisions, and this is the reason for the pessimism of Finance Ministry officials and the fear that as long as the dead end situation continues, the economic problems will turn into a real crisis. 

The economic situation was one of the reasons for the attempt of the Likud and Blue and White parties to promote negotiations for a unity government in November and December. Such a government, which would not be dependent on smaller parties, could have rejected sectorial coalition demands, but for various political reasons it did not happen. Such a coalition is much needed for Israel, but in light of the current political situation it is quite doubtful that it could form even after the election in March. 

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Found in: Economy and trade

Danny Zaken is a journalist who works for the Israeli public radio station Kol Israel. Zaken has covered military and security affairs, West Bank settlers and Palestinian topics. He was a Knight Wallace fellow at the University of Michigan and completed the BBC Academy's journalism program. Zaken lecturers on media and journalism at the Hebrew University, the Mandel School and the Interdiscinplinary Center Herzliya. He is the former chair of the Jerusalem Journalists Association.

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