Second Nationwide Lockdown Pushing Israel Into Central Bank’s Worst-case Scenario

Israel's coronavirus cabinet to discuss harsher lockdown restrictions on Monday

A policeman inspects a driver's papers at a checkpoint in Jerusalem as Israel sees a second nationwide lockdown, September 19, 2020.
A policeman inspects a driver's papers at a checkpoint in Jerusalem as Israel sees a second nationwide lockdown, September 19, 2020. Credit: MENAHEM KAHANA / AFP

The coronavirus cabinet is expected to discuss on Tuesday the possibility of tightening the three-week nationwide lockdown given the rise in infections and mortality and the burden on hospitals.

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According to Health Ministry officials, the most significant restriction to be discussed in the coming days is limiting economic activity of the private and public sectors – a move that is expected to restrict contact and make restrictions easier to enforce, but could also cause economic damage.

According to Health Ministry Deputy Director General Prof. Itamar Grotto, it is already clear now that at the end of two weeks of lockdown, when the Knesset will be required to extend restrictions for another week, restrictions will not be eased, as was initially thought would be possible at that point.

A visit to the Tel Aviv port over the Rosh Hashanah holiday found all businesses shut and full compliance with Health Ministry directives. But the economic significance of the lockdown is less than encouraging, bringing Israel closer to the pessimistic prediction of the Bank of Israel governor less than three weeks ago.

The central bank forecast two scenarios. The optimistic one was based on the economy almost fully reopening in September, with no more waves of infection until the end of the year. Under those circumstances, growth in 2020 would be hurt to the tune of 4.5 percent of the GDP. The pessimistic scenario was that waves of infection would require reducing economic activity until a vaccine is developed against the coronavirus. Under those circumstances, the economy would shrink by 7 percent and the unemployment rate would reach 13.6 percent by the end of the year, after it had declined to 11.2 percent at the end of August.

The plan put together by the Finance Ministry and the Prime Minister’s Office to expand the safety net that the state gives businesses and the unemployed, mainly by lowering the threshold for receiving aid, seems to draw on lessons learned from the first lockdown. The main one is encouraging employers to retain their workers instead of furloughing them.

The state will give employers a grant of 5,000 shekels a month ($1,463) for each employee they keep on, depending on how much the business has been hurt and the number of employees retained in September and October. For example, businesses that lost 80 percent or more of their revenue would receive a 5,000-shekel-per-worker grant for every worker retained beyond 40 percent of their workforce as of September.

Employers whose revenues declined only 25-40 percent would need to retain at least 80 percent of their workers, only after which they would receive the 5,000-shekel-per-worker grant.

LISTEN: Why did Israel let 70 evangelicals flout its COVID-19 travel ban?

This is a different system than the one that was used in the first lockdown, where the state gave employers a grant of 7,500 shekels for each worker they rehired. That system encouraged employers to lay off their workers, while the new system will have them thinking twice whether to do so.

On the other hand, the state will continue providing its safety net for furloughed workers and will pay unemployment until June of 2021 or until the unemployment rate drops to less than 7.5 percent.

In the Bank of Israel’s pessimistic scenario, the unemployment rate at the end of 2021 will be 12.1 percent – and that ensures payment of unemployment until at least June 2021. This, however, may create an incentive not to look for work, a scenario the government doesn’t know how to address.

In addition to the grants to retain their workers, the government will also help employers in other ways, by providing grants to pay municipal taxes and by expanding government guaranteed loans for small and medium-size business from 18 billion shekels to 40 billion shekels.

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