Prime Minister Benjamin Netanyahu and Finance Minister Moshe Kahlon Monday night presented an 80 billion shekel ($22.3 billion) economic program to help the economy get through the impact of the coronavirus pandemic.
The extra spending will cause the budget deficit to balloon to 10% of gross domestic product, from about 3.5% and raise the ratio of debt to GDP to 75% from about 60%.
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The spending package includes the 10 billion shekels the government had allocated before Monday. Nevertheless, Kahlon called it the biggest ever in Israel’s history to address an economic crisis. It came as Netanyahu said more severe lockdown measures were on the way.
“We approved a plan for 80 billion shekels for three or four months. That’s 6% of GDP and that’s a lot. Half of that money will come from the state budget and half through loans,” he said in a broadcast statement.
Kahlon, who spoke from a separate site after Netanyahu self-isolated Monday said: “We’re contending with the great economic crisis in our history. Within a month, we’ve seen a jump from 30,000 unemployed to one million job seekers. Workplaces and households are collapsing.”
But, he added, “The economy will return to its former strength a lot faster than everyone expects.” Kahlon said he expected regular economic activity would gradually resume after the Passover holiday ends in mid-April.
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The economic program contained four elements:
• A plan that includes 10 billion shekels in extra health care spending.
• About 20 billion shekels for a safety net for salaried workers and the self-employed, of which 17 billion is slated for jobless benefits.
• For small, medium-sized and large businesses, 32 billion shekels in aid.
• About 8 billion shekels to boost the economy after the crisis eases.
“I know this won’t return the situation to what it was. As needed, we will make changes. I have no doubt that as long as the crisis continues over time, we will need further programs. We can’t let the economy collapse,” Kahlon said.
Regarding unemployment benefits, applicants will now need to show they were previously employed for six months. In addition, 130,000 Israelis over the mandatory retirement age of 67 wll now qualify.
Self-employed Israelis whose income has been affected by the pandemic will be eligible for as much as 6,000 shekels in April and 8,000 in May, from a 3 billion shekel allocation.
Aid for business includes 6 billion shekels in direct aid to firms hurt by the lockdown and 6 billion in tax breaks. Small and medium-sized businesses will be eligible for a total of 8 billion shekels in loan guarantees. Another 4 billion will be available to large lend money for big businesses, defined as those with annual turnover above 400 million shekels.
The program isn’t expected to include compensation for large businesses for lost revenue. Whatever compensation there is will go to small and medium-sized firms, among other ways by waiving municipal taxes (arnona). Most of the aid will be in the form of state-backed loans.
Officials involved in drafting the program said it was on the same scale as those of many European countries and much larger relative to the size of the economy than that of the United States.
“It will enable businesses to survive at least for two or three months. This gives us critical time, and also gives us more leeway later. There are all kinds of worries about a second [coronavirus] wave, and the mutations of the virus, so this program keeps money for the future, in terms of being able to continue financing the deficit and debt,” said one of the officials.
Economists, speaking to TheMarker before Netanyahu and Kahlon unveiled the program, said the goal should be to enable the economy to avoid turning what is now a liquidity crisis into recession marked by business failures and bankruptcies. That entails a combination of fiscal and central bank policies.
The 19th-century economic scholar Walter Bagehot coined the rule that central banks should be the lender of last resort in times of economic crisis. In that role, they should act early to provide unlimited credit to companies that are solvent but suffering liquidity problems, and that can provide adequate collateral and pay interest rates.
“We need to act on this principle, even if in the current crisis it is difficult to determine who will be able to repay the money and what is the best collateral,” said Nadine Baudot-Trajtenberg, a former Bank of Israel deputy governor who now teaches at Herzliya’s Interdisciplinary Center.
She suggested that as an alternative to taking collateral, the state should take equity stakes that would be held not by the central bank but by the government. She pointed to the 1980s precedent when the government took stakes in the banks in exchange for bailing them out.
“Unfortunately, there may be a need to take shares as well in nonfinancial companies deemed to be essential, like the airlines,“ Baudot-Trajtenberg added.
Prof. Momi Dahan, of Hebrew University of Jerusalem’s School for Public Policy and Government, had no concerns about what in effect would be nationalization.
Baudot-Trajtenberg said Israel has the leeway to spend to cope with the crisis. Israel’s public debt isn’t large compared to GDP and is relatively long-term. A large part of it in shekels. “We can increase the debt quickly and if we manage it properly once the crisis is over, it will go down. I’m not worried about a bigger [budget] deficit or debt,” she said.
Dahan agreed, although he said Israel must set limits on increases in its deficit and debt. “If this is truly a crisis that happens once every 100 years, even if there is still an element of uncertainty in this question, this is the very reason we shrink the debt [in good times],” he said.
As to the issue of the Bank of Israel’s printing money, Baudot-Trajtenberg said: “We’re not there yet. The money we have should be put in places you it can revive supply after the crisis, and not only on the side of demand, so we do not kindle hyperinflation.” Government money should be used to ensure firms don’t not go bankrupt.
Baudot-Trajtenberg warned against trying to fund the crisis through taxes, for example, increasing the tax on gasoline. “Raising the tax on gasoline now will not bring a lot of money but will broadcast the wrong message,” she explained. “Imagine a taxi driver. If they raise taxes now, they are telling him in effect that in two months you’ll return to work without any idea what the demand for your services will be but that you can be sure your expenses will be higher.”
One solution could be to lower wages in the public sector, she added. It could be in the form of a mandatory loan that is returned to civil servants later with interest.
Over the last several weeks there has been a battle of decision-makers between those who want to tighten the lockdown as much as possible and those who warn against the economic repercussions of such a move. The debate has been presented as between those who prioritize human life and those who see things through money. But Dahan said that dichotomy is inexact.
“Not everyone understands that bringing economic activity to a halt involves human life,” Dahan said. “As the economy slows down, there is less money for the healthcare system and to purchase medicines privately, to prevent road accidents, for defense and to help people with suicidal tendencies.”
The bottom line: “There’s a risk that relates to the great importance of saving the lives of coronavirus sufferers, versus the saving the lives of those who will be at risk in the future. That needs to be considered in making decisions.”
In order to strike a better balance between the two goals, Dahan suggests restoring economic activity in a considered way.
“In the beginning, a lockdown was the right tool. But as time passes it becomes more appropriate to use 21st-century tools and to rely less on those of centuries past,” he said. For instance, the authorities could allow those who have developed an immunity to the coronavirus to return to work and to conduct many more tests to confirm contagion and quarantine those who have tested positive for the virus.