Failure to Pass State Budget Has Cost Israelis $6.5 Billion So Far

The Knesset won’t get another chance to pass a 2021 budget until July at the earliest. Practically, reforms will only be felt a year from now

Nati Tucker
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Estimates show the lack of a state budget in 2020 has cost Israelis over $6 billion. Israelis wait at  a street crossing in Tel Aviv, December 2020.
Estimates show the lack of a state budget in 2020 has cost Israelis over $6 billion. Israelis wait at a street crossing in Tel Aviv, December 2020. Credit: Moti Milrod
Nati Tucker

For Israeli consumers, the cabinet’s failure to pass budgets for 2020 and 2021 has come at a huge cost – 21 billion shekels ($6.5 billion) to be exact for the two years.

TheMarker arrived at this estimate based on the cost savings that were expected had the reforms included in the Economic Arrangements Bill – supplementary legislation to the annual spending package – been approved. Only reforms whose economic value to the average Israeli could be quantified are included. In practice, delayed reform often exacts a far heavier price on economic activity.

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Almost no reform measures were taken in the two years of back-to-back elections and the chaos of the brief national unity government. The last time lawmakers passed a budget and arrangements law was in March 2018, for 2019.

Government officials view 2020 and 2021 as lost years, and not only because of the coronavirus crisis. The pandemic should have shaken things up enough to make reforms easier, but it didn’t. Instead, Prime Minister Benjamin Netanyahu and Finance Minister Yisrael Katz deliberately prevented passage of either the 2020 or 2021 budgets, scuttling all the reform measures treasury officials had in the works.

The Knesset won’t get another chance to pass a 2021 budget until July at the earliest. The practical effect is that the reforms will only be felt a year from now.

The Arrangements Bill drawn up by the Finance Ministry in July contained measures designed to lower the cost of living. In some cases, the positive impact was quite clear; in others, it depended on other factors.

But on balance, the cost to Israeli consumers is estimated at 10.5 billion shekels a year. These included aid to farmers, reducing traffic congestion and increasing the housing supply. Each item promised to be significant, although how much depends on a number of variables. In addition, the treasury budget division had prepared smaller reforms aimed at reducing household expenses.

Israeli Prime Minister Benjamin Netanyahu, right, with current Finance Minister Yisrael Katz, during the weekly cabinet meeting at his Jerusalem office, Sunday, May 12, 2019.Credit: Gali Tibbon / AP

How the failure to pass a budget affects the average Israeli

Unification of environmental regulations: Many of the environmental restrictions on business are contradictory. The Finance Ministry estimates that “green” laws cost Israeli business 3.7 billion shekels a year.

The treasury reforms aim to align local regulations with Organization for Economic Cooperation and Development standards and reduce fines to facilitate enforcement. Delaying the changes costs between 2 billion and 3 billion shekels annually.

Reducing regulation on new businesses: About 160,000 businesses in Israel must obtain licenses before they can open, a requirement that costs at least 25 billion shekels a year. Efforts to cut the red tape have met with little success.

The proposed reforms would shrink the time table for getting a business license and require officials to make a better effort to estimate the costs of their regulations. This is particularly critical in light of the fact that business startups are supposed to play a major role in the post-pandemic economic recovery. The lost savings from the failure to implement more efficient rules is estimated at 1 billion shekels.

Stores in Israel spent a significant part of 2020 closed - this street in Jerusalem is usually buzzing with tourists and locals.Credit: Emil Salman

Food imports: Imported items classified as sensitive are subject to rigorous inspection. This imposes heavy costs that translate into higher food prices for consumers.

Under the stalled reform plan, food deemed sensitive could be imported on the basis of the importer declaring it in advance that it meets health standards. Enforcement will be done not at customs but in the markets. The failure to implement the change has thus far cost 1.5 billion shekels in lost savings to the economy.

Opening the cosmetics and personal care market to competition: Israel’s 6-billion-shekel market is highly concentrated, leaving consumers paying high prices and enjoying fewer product choices relative to their OECD peers. The treasury believes that the regulations barring so-called parallel imports (that is, imports done through channels other than the original manufacturer) are outdated.

Israel was supposed to adopt the Swiss model, i.e., self-regulation and more market-based inspections. It also proposed more private-label and parallel imports. All told, estimates are that measures like these could cut the cost of toothpaste by 40% and soap and shampoo costs by 30%.

The cost to consumers for every year of delay is about 600 million shekels.

Fast track for imports of consumer goods: The Finance Ministry proposal would allow some consumer products to go through a “green line.” Instead of a customs inspection, the importers would simply declare what goods have arrived. Israel’s often unique product standards would be brought into line with international ones. The end goal is to reduce delays at customers, especially for small- and medium-sized items.

The estimated savings are 400 million shekels annually.

Promoting renewable energy: Permits to install photovoltaic panels on the roofs of jointly owned buildings and charging infrastructure for electric cars at street level is aimed at helping reduce greenhouse gasses and meeting the national goal of generating 13% of energy from renewable sources by 2025.

The delay is also costing the economy – by an estimated 4 billion shekels in jobs that have not yet been created. Consumer are losing out directly because electricity rates won’t drop until the alternative-energy reforms are in place.

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