The legislation delaying the deadline for passing a 2020 budget removed the threat of a snap election until the end of the year. But in order to put out that fire, the government fed another one that’s just as dangerous. Government spending is now out of control.
I use the term “government spending” rather “budget” or “fiscal policy” for good reason.
Two-thirds of the way into 2020, Israel has no budget for the year and it doesn’t look like there will be one anytime soon, perhaps never, except as a formality to cover the final week of the year when the new December 23 deadline arrives. Lacking a budget, government spending is based on the 2019 budget and it can’t approve any new spending or plans.
To call what Israel has now “fiscal policy” would be equally meaningless. On multiple occasions over the year, the Knesset voted to increase spending over and above the 2019 level in order to fight the good fight against the coronavirus.
However, the last round of increases – the ones that came as lawmakers voted to extend the budget deadline – packed in a lot of non-coronavirus spending: 3.3 billion shekels ($970 million) for defense (at Netanyahu’s behest) and another 400 million on yeshivas (to win Haredi support for the deadline).
The coronavirus has created such a budgetary conflagration that the arsonists feel free to light their own fires. These days, everyone agrees that the pandemic’s economic fallout is so severe that governments have no choice but to spend heavily, with few questions asked. That makes it a great time to slip in other, unrelated spending. Nobody will notice, perhaps not even the credit rating agencies who are struggling to make sense in a fiscal world where double-digit budget deficits are the new normal.
So, if that’s the new normal, why should we care? As the late U.S. Senator Everett McKinley Dirksen is said to have once famously said, “A billion here, a billion there, and pretty soon you’re talking real money.” And, that was long before the coronavirus.
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A difference in management
The fact is that if you look only at the headline numbers, Israel doesn’t seem to be doing so badly. The budget deficit will probably reach about 14% this year, which is four times what it was in 2019 and at a level not seen since the early 1980s when Israel was teetering on the edge of default. But the fact is that across the developed world, governments are running deficits of the same order. The United States’ deficit may reach 18% of GDP.
The difference between Israel’s red ink and the others is how it is being managed. Our spending seems to be subject to few if any rules or priorities. The absence of a budget – and, so it appears, any serious preparations for a 2021 budget either – is prima facie evidence of that.
Programs like the 750-shekel grants everyone received regardless of financial circumstances or the extended unemployment benefits that are discouraging people from returning to work are motivated by political calculations or by panic. The consensus is that Israel’s jobless rate will remain at elevated levels for a long time, but there’s no plan for how to deal with it. Instead of the strongman we need as a finance minister right now, we’ve been saddled with Yisrael Katz, who seems far more beholden to Netanyahu’s political requirements than to the needs of the economy.
Karen Vartapetov, the Standard & Poor’s analyst covering Israeli debt, said in a recent interview that he didn’t think Israel’s credit rating was in imminent danger of being cut: Israel is an advanced economy with “relatively effective institutions, relatively high income and credible economic policies,” he explained.
This should shield it to a degree at a time when its raw numbers look pretty bleak. But is it true?
For the better part of the last two decades, the treasury kept the country’s fiscal house in order. Finance ministers came and went but the basic policy line of fiscal restraint was preserved. It all began to unravel when Moshe Kahlon took over in 2015 and promised to be “the people’s finance minister” with generous programs that he didn’t have the money to pay for even then without swelling the budget deficit.
Three back-to-back elections and the coronavirus crisis have completed the job. What was under Kahlon a gradual unraveling has turned into complete chaos. Israel today is coasting on its past reputation, not on its current performance.
It didn’t have to turn out this way. The onus lays squarely on Netanyahu, who has jettisoned his economic principles of small government and free markets.
If he had done this pirouette because he understood that the coronavirus had created a new economic reality, he could be forgiven. But it has nothing to do with changing circumstances but his stubborn refusal not only not to step down in the face of criminal prosecution but even deign to share power in the midst of an unprecedented economic crisis.
The bottom line is that instead of a unity government dedicated to combatting the crisis, we have a divided coalition struggling to act as its leader maneuvers to bring it down and ensure that no one apart from himself takes credit for victories against the pandemic. Netanyahu is giving us elections instead of government.