Knesset dissolved on Tuesday at midnight, sending Israelis to a fourth round of election in two years. Anyone who tried working with the unity government understood that it was best that it ended its tenure, after half a year of not managing to pass a budget or make appointments.
The great hope is that after the election there will be a functioning government within a few months, but under the circumstances political stability still seems beyond reach. In the meantime, Israel will continue to pay a heavy price in many areas.
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The main reason is the atmosphere of chaos. At the beginning of December, the credit rating agency Moody’s maintained Israel’s sovereign rating, while noting that it was deducting points for “institutions and governance strength.”
The international rating agencies couldn’t ignore the most recent turn of events: Four elections in two years. A potential downgrade to its sovereign debt rating. A new election spells uncertainty over the next government’s policies.
Uncertainty is bad for business, and the biggest economic player of all – the government – is paralyzed.
Then comes the political decision-making. Anyone who thought the dysfunction of the past six months was a record needs to see how bad things can become. Now, decisions on lockdowns and economic easing will be made with an eye to votes. Not to mention any future grants or compensation. Future decisions about reopening the economy in response to vaccination benchmarks will also be made with an eye to the polls.
Most important, as hundreds of thousands of Israelis get vaccinated, Israel will need to rehabilitate its economy. This could be a chance to fix the country’s long-term economic ills, but it’s hard to see how a vulnerable transition government preparing for the wheeling and dealing of coalition negotiations can do this well.
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And then there’s the issue of the budget. Israel will go at least six months more without a budget, as it is forced to work off the last approved budget, which will be an unprecedented two years old.
The Finance Ministry has presented immediate legislative changes necessary to keep the 2021 budget from being 100 million shekels ($31 million) in deficit. This includes 50 billion shekels for coronavirus-related expenses, and transferring a 20-billion shekel budget surplus from 2020 to 2021.
In a cabinet meeting Tuesday, the coalition reached agreement on some of the items. Even so, the damage will be severe to many of the institutions forced to work off of the 2019 budget. Welfare agencies will be particularly hard hit, with many even suffering sharp budget cuts at a time when the pandemic has pushed many Israelis into poverty.
International bodies have warned that the pandemic will exacerbate Israel’s high inequality. Now the institutions that could address this won’t have the money to operate.
Haredim will be particularly affected. The Haredi parties’ flagship issue is yeshiva funding, which will drop 30% if no budget is passed for 2021.
Then there’s the direct cost of another election. It’s not clear how many billions of shekels the election boards, the parties and the additional vacation day will cost, but coronavirus protections will tack on at least 50 million-60 million shekels more.
International bodies expect Israel’s economy to grow more slowly in 2021 than the global average. In its most recent report, the Organization for Economic Cooperation and Development forecast that Israel’s gross domestic product would contract by 4.25 percent in 2020, around the international average.
But for the next few years, the OECD expects Israel’s growth to fall below the average due to high unemployment and the wave of bankruptcies that is likely to hit once government aid ceases. Thus the OECD forecasts Israel’s GDP will increase by only 2.25 percent in 2021, under the global average forecast at 4.25 percent.
This forecast, pessimistic even compared to local forecasts by Israel’s Finance Ministry and the Bank of Israel, takes into account Israel’s political instability. The rating agencies also took into account Israel’s political instability.
And yet, if Israel is heading to elections again, the pessimistic forecast is likely to become even more pessimistic. Israel won’t have a government or a Knesset to instate a post-pandemic recovery plan.