Analysis

Early Elections: If Israeli Politicians Hit the Campaign Trail, Economy Gets Dead-ended

Calling a vote brings policy-making to standstill and could even undo the government's current achievements.

Prime Minister Benjamin Netanyahu with Moshe Kahlon. 2015.
Prime Minister Benjamin Netanyahu with Moshe Kahlon. 2015. Emil Salman

On Friday, Prime Minister Benjamin Netanyahu’s government marked two years since it was elected to power; on Saturday, it was already contemplating the end of the road as Netanyahu threatened to call early elections if Finance Minister Moshe Kahlon didn’t stand down in their dispute over the future of public broadcast media.

Netanyahu is off to China and the Knesset goes into recess in two days, so there is time to calm coalition tensions. But Kahlon has said he will not compromise on the issue of Kan, the public broadcaster Netanyahu is determined to shut down before it is due to go on the air April 30.

What is likely to be motivating the prime minster more than public broadcasting is the police investigation closing in on him and the risk of an indictment. Elections would delay any indictment, but they would also jeopardize the economy’s strong performance.

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By every measure, Israel is doing very well now. Economic growth jumped in the final quarter of 2016 to a 6.5% annual rate, unemployment is at its lowest in decades, inflation is almost nil and the government is running smaller-than-expected deficits thanks to swelling tax revenues.

Elections would put economic policy-making into low gear for several months, freezing reform efforts – perhaps even the tax cut Netanyahu and Kahlon proposed last week – and turning 2017 into a lost year economically.

If early elections are scheduled for July or October, the government won’t be formed until September or December. During the interim, the current government will rule, but ministers will be preoccupied with campaigning and not with the business of their ministries.

Even if the threat of early elections is removed, Netanyahu has opened the Pandora’s Box: Elected officials will have one eye on the polls and that will inform their decisions more than anything. The government’s surplus tax revenues are going to be an irresistible temptation to eat up.

More than that, it is hard to see how the two main players of economic policy – Netanyahu and Kahlon – will be able to maintain a working relationship.

As it is Kahlon has become worried that the prime minster is stealing credit for his achievement. The prime minster insisted that a declaration on planned tax cuts be put out jointly and muscled in on celebrations in Eilat last week to mark the launch of a Kahlon housing program.

How much will elections cost?

The coalition is riven by other quarrels that make it unlikely it will be able to last much beyond the end of 2017.

Israel’s frequent elections make it hard to pursue a consistent, long-term policy. In the best-case scenario of elections in early 2018, Kahlon will have held the finance portfolio for two years and 10 months. Yair Lapid, his predecessor, had just one year and eight months, and finished with almost nothing to show for his term.

A study by the Israel Democracy Institute found that since 1990 the average finance minister served for less than two years, the 13th shortest among 16 countries surveyed. In Britain it’s five years, Ireland four and Denmark three and a half.

Kahlon’s relatively long tenure undertook several major initiatives to cool off the housing market and won approval for key banking reforms. But it’s too soon for voters to feel the impact.

Moreover, one of his key programs – the tax on landlords who own three or more homes – is in danger from a court challenge and needs an interested party like Kahlon to defend it. Right now, it looks like the High Court may well disallow it on the grounds that the legislative process that led to its passage was faulty. But if early elections are called, Kahlon is unlikely to find a Knesset majority. In any case, an election-minded Likud may well seek a vote rescinding the law.

That’s just one piece of legislation, but if the politicians begin playing election games with it, the result will be the kind of uncertainly over the property and construction market that the political football of Lapid’s abortive zero-VAT law caused. That uncertainty may easily translate into stepped-up demand for homes, which will send prices soaring.

Then, of course, there is the direct cost of elections, which could add up to 2.5 billion shekels ($690 million) or more. The Election Day holiday will cost Israel as much as 2 billion shekels in output. The Elections Commission budget will be between 200 million and 300 million shekels and the cost of subsidizing campaigns by the government another approximately 220 million.

That’s not a lot of money relative to Israel’s budget or the economy, but it is certainly money that could be put to use in much better places.