If you’ve been following the media coverage of the new Netanyahu government, you might think that having barely recovered from one plague, Israel is about to be hit by another just as bad.
The first plague was the coronavirus and it left hundreds of thousands jobless and threatens to leave a wave of bankruptcies in its wake. The emerging second plague is a feckless government incapable of rescuing the economy and destined to waste money until it creates a third plague in the form of a financial crisis.
Make no mistake, the three plagues could happen if it turns out that Plague No. 1 comes back as a second wave of contagion, sending everyone back into lockdown. But we’re not there yet. Apocalypse Now has become Apocalypse Maybe Later.
Why not now? The raw, unadulterated numbers on the economy look nothing short of disastrous. Israeli gross domestic product is forecast to shrink by an unprecedented 5% or more this year. The unemployment rate was 27% in April and is expected to remain at a recession level 8% as we move into 2021. The budget deficit, which was a source of anxiety in the good old pre-pandemic days when it was 3.9% of GDP, is expected to push past 10% this year.
But we shouldn't relate to these numbers the same way we would in a normal economy. Take Israel’s jobless rate. Right now it’s higher than America’s was in the worst days of the Great Depression, but the vast majority of the unemployed are on unpaid leave and will be going back to their old jobs as the economy returns to normalcy.
The 10% budget deficit? If it were a structural deficit – in other words, the overspending represented fix costs rather than one-time programs – this would spell real trouble. But its almost entirely about coronavirus spending that will stop when the crisis is over.
In any case, in the first month after it approved 100 billion shekels ($28 billion) to cope with the pandemic, the government managed to spend only a quarter of the amount. Now that the virus seems to be dissipating, there’s a good chance that the full amount may never be spent.
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As Standard & Poor’s noted last week when it affirmed Israel’s AA-minus credit rating, Israel’s economy is in a good position to bounce back from the lockdown. Government aid is there for businesses that need it, the corporate sector is not highly indebted and the tech sector is dynamic and globally competitive. The lockdown was long enough to undo businesses that were struggling before the pandemic but it wasn’t long enough to destroy those that were fundamentally sound.
So Israel’s recovery won’t be thwarted by its economic fundamentals. The big unknown is whether the government will, to put it crudely, screw things up.
Hardly a show of responsibility
I admit, we’re not off to a good start. Even as the coronavirus was raging, Netanyahu took his sweet time assembling a coalition while he negotiated irrelevancies like annexation and control the justice system. The embarrassing scramble in the final stretch for jobs like minister of water resources didn’t signal any sense of responsibility, much less urgency, from the rest of the cabinet.
However, from these ashes of megalomania and petty politics a decent government may yet emerge. As loathsome as some feel he may be personally, Netanyahu is a responsible and effective prime minister when he isn’t obsessing about his criminal trial. Even when he was heading a caretaker government, Netanyahu did a good job of preparing early and adequately for the pandemic.
Going forward, the odds are pretty good that the unity government will function better than its problematic formation has suggested.
For one, on critical non-coronavirus issues, its members are on the same page ideologically, especially with Yamina sent into opposition exile. We shouldn’t assume there will be endless backbiting and paralysis. Moreover, for the first time in years, the Finance Ministry is being led by a Likud minister and loyalist rather than the leader of a junior partner party. Netanyahu has every reason to want to ensure in its successes rather than undermine them.
Unlike in America, where fiscal rectitude has all but been tossed into the trash heap of history, Israel has preserved a broad consensus about deficits and debt. Those policies have served the economy so well over the last two decades that even a crisis on the scale of the coronavirus hasn’t loosened the purse strings.
No politician wants to talk about controlled spending – witness Netanyahu’s remarks on a budget of “hope” and “jobs, jobs, jobs” (and, no, he wasn’t referring to the cabinet) – but fiscal rectitude is how it is going to be how it is. That is, unless the government does break down into infighting and politicians go into election mode.
Of course, if there really is a second wave on par or worse than the first coronavirus wave, then it’s not just Israel but the world that will be heading into real trouble. There won’t be the economic tools to counter it – economists will have to raise their hands in surrender and hope the scientists can come up with a vaccine.