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Israel Won't Bounce Back From Double Whammy of Missile War and Budget Deficit

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Missiles from Israel's Iron Dome air defense system destroy incoming rockets fired at Israel from Gaza, Ashkelon, Israel, November 13, 2018.
Missiles from Israel's Iron Dome air defense system destroy incoming rockets fired at Israel from Gaza, Ashkelon, Israel, November 13, 2018.Credit: AFP

To people in Tel Aviv or Jerusalem, and certainly in the Galilee, the mini-war with Hamas seems like someone else’s business. As of Tuesday afternoon, around 400 rockets had been fired from Gaza on the Negev, claiming two lives and injuring 85. But if not for the news alerts coming over their smartphones, the rest of Israel would be oblivious to the whole thing.

They shouldn't be. As I’ve said before, the missile threat is growing rapidly, as just one day of fighting this week demonstrated.

In 2006 Hezbollah hurled some 4,000 missiles at Israel over the 34-day Second Lebanon War (averaging 117 a day). Eight years later a much more lightly armed Hamas launched 3,360 projectiles in 50 days during Operation Protective Edge (averaging 67 a day).

This time around, in less than one day, the army estimates that Hamas and Islamic Jihad fired 370 rockets and mortars at Israel, from an arsenal it puts at 20,000.

Iron Dome and the other anti-missile systems are supposed to be Israel’s insurance policy, and the statistics so far have been encouraging.

In 2006, before Iron Dome, 53 Israelis were killed, a third of the country had to take cover in bomb shelters and 30,000 insurance claims were filed; in 2014, with Iron Dome, just two were killed and only 2,400 claims for damage were filed.

Burning tires (the thick black smoke) and launching incendiary balloons and kites from the Gazan border with IsraelCredit: \ Eliyahu Hershkovitz

But, as justifiably lauded as the Iron Dome system is, it isn’t perfect. We’ve seen that on more than one occasion, even when it wasn’t coping with a barrage.

Holes in the Iron Dome

Over the first day of fighting this week, the IDF says it intercepted 100 of 370 projectiles. The others were mostly headed for open areas that didn’t require intervention, but Iron Dome failed to stop several homes from being hit.

Imagine a scenario where Hezbollah launches a war. By one recent count, it now has an arsenal of 130,000 rockets and missiles, nine times the number it has in the Second Lebanon War. They are more powerful and have a longer range than 12 years ago. Hamas, similarly has more firepower. Iron Dome won’t be able to cope.

Thus, the assumption that Israel and the economy will bounce back quickly from the next missile war is dangerous.

Plausibly, business will grind to a halt, the tourism industry will implode, and investors will start taking the security situation into account and hesitate. The cost of reconstruction will also run high.

Given the predictably high cost in material and human lives, I hazard to guess that is one reason why Netanyahu has been so loathe to entangle Israel in a full-fledged conflict.  

Here and there we have seen hints at what could be in store. Take for instance the brief halt of international flights to and from Ben-Gurion International Airport in 2014, during Operation Protective Edge, which was far from being a full-blown war. 

But wait…

Meanwhile, there’s another war being fought, this one between the Finance Ministry and the country’s economists. Like the one in Gaza, it seems pretty distant, if not downright, irrelevant to the majority of Israelis who are enjoying the fruits of a seemingly unstoppable economy.

You might even say it’s boring and unintelligible, but (as American TV hawkers used to say), “but wait …”

Last week, the treasury reported that the budget deficit in the 12 months through October had ballooned to 3.9% of gross domestic product. It is headingfar above the target set in the 2018 budget.

That is a seemingly obscure statistic. In reality, it is a measure of how well the government is controlling its spending.

Fiscal restraint was a key reason Israel weathered the Great Recession in 2008, why its credit rating is so high, and why foreign investors are willing to ignore our problematic security situation. But Finance Minister Moshe Kahlon has been playing a dangerous game with fiscal policy, cutting taxes and increasing spending on and off the books, and counting on one-off tax windfalls.

He and his aides say their critics are too focused on one number (that pesky deficit), but when you look at the big picture, everything looks okay.

Quite to the contrary, when you look at the big picture, things look worrying. The government has taken on long-term spending commitments, and Netanyahu wants to increase the defense budget. It seems like the era of tax-revenue windfalls is over. Elections are on the horizon, which isn’t a time when politicians like to undertake unpopular austerity policies.

The fiscal chickens are coming home to roost and at an inauspicious moment. The world economy is looking shakier in part thanks to Trump’s trade wars. In Israel, after 15 years of virtually non-stop growth, time for the economy is no longer on our side – the odds of a downturn are growing.

Israel is walking into this period of uncertainty with a problematic fiscal position and a rising security threat. We’re seeing the warning signs now, and that should have the attention of people in Tel Aviv and Jerusalem as much as in the Negev.

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