The debate around Israel’s next state budget is focused right now on the technical question of whether the government will legislate separate budgets for what’s left of 2020 and all of 2021, or a single one covering the entire period.
This question has important political ramifications for the government and no less for the economy. But there are even bigger ones about messaging via the budget that have yet to be addressed.
When Prime Minister Benjamin Netanyahu was forming his national unity government with Benny Gantz, treasury officials had hoped that by the time the cabinet was given a draft budget to approve the Israeli economy would be on the road to recovery from the coronavirus crisis, even if the threat of a second wave of contagion remained.
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Today there’s no recovery in sight: Israel’s ability to cope with the pandemic looks worse than it did a month ago. Up-to-date data on the labor market isn’t available, leaving Finance Minister Yisrael Katz relying on Google for guesstimates. Anyone who had expected to fly during July (not to mention the airlines who hoped to fly them) have had their hopes dashed.
The level of economic uncertainty remains high, not just in relation to macroeconomic questions such as what the unemployment rate or gross domestic product will be at the end of the year but even question about households are behaving right now. People who were laid off or put on unpaid leave have no way of knowing whether they will be back at work anytime soon.
For now, at least, they know that their jobless benefits are being extended through August.
The decision was taken on Sunday at the request of Labor Minister Itzik Shmuli, but treasury officials are doubtful about whether the government really needed to commit itself to an additional two months on jobless benefits. The fact is there are no good data on the unemployment rate nor does anyone know whether the incentives being given to employers to hire are working.
“There may have been more effective ways to spend the billions that Shmuli and the National Insurance Institute requests will cost us,” said one official, who asked not to be identified.
Meanwhile, instead of a comprehensive policy, the public finds itself to hear from Netanyahu and Katz about another new extension of some benefit or emergency regulation.
Some look at this piecemeal strategy positively, as a sign that the government is acting cautiously and responsibly. But others see it as a sign of hesitancy. There was a small hint of the latter view in remarks by Bank of Israel Governor Amir Yaron in an interview with Bloomberg News two weeks ago.
“What we didn’t do very well upfront was to be very clear about unemployment support, various grants to business entities. We would do well if we had more plans that were clear to the public – what they would be entitled to in case there is such a localized lockdown or even a more major one,” he said.
Yaron and his colleagues at the world’s other central banks are tying as much as possible to reduce the uncertainty at least in the areas where they can make their own decisions with a willingness to take unconventional steps to encourage economic growth. Most of the major central banks have done more than simply lower policy rates to very low or even negative levels but have hinted, if not openly declared, that they are prepared to keep to expansionary policies in place for as long as it takes.
Andrew Abir, the deputy governor of the Bank of Israel, said in a June 18 lecture that the bank is not only acting “aggressively” in its decision to buy 50 billion shekels ($14.5 billion) in government bonds but that it would step up its purchases if the economic crisis grows worse and introduce new programs, such as buying corporate bonds.
The central bank’s intervention in the bond market was done with the aim of ensuring orderly trading, but it has also had the effect of lowering yields in the capital market. Ten-year government bonds as of Sunday were trading at just 0.6%.
The low interest rate environment and the forces that are expected to work to keep them that way going forward will be a big help to the government whose yawning budget deficit will require to raise debt in the triple-digit billions of shekels. The cost of that money will be very low and help Israel spend its way out of the coronavirus crisis through investments.
Some of that spending was already slated before the pandemic struck, such as investment in public transportation, advanced telecommunications networks and digitization of government services; others are being developed now to address the urgent need of bringing down the unemployment rate and prepare Israel for the job market of the future.
Investments like these are exactly what needs to be put at the top of the priorities list of the people preparing the state budgets of the next few years, says Prof. Zvi Eckstein, who is head of the Aaron Institute for Economic Policy at the Interdisciplinary Center at Herzliya and a former deputy Bank of Israel governor.
“It’s important to formulate long-term policies that support employment and productivity and to be forthright about how it will be done,” he said.
The government needs to decide what projects are important for the next two to three years, to put them into the 2020 budget and promise that they will be in the 2021 and 2022 budgets as well … like infrastructure and digitization. The proposals are already on the drawing board – they need to be brought to fruition.”
Eckstein’s call for lower the level of uncertainty became more urgent after two indices were released on Sunday that provide a barometer of economic activity before the official GDP figures come out (which for the second quarter will appear in the second half of July).
The first is the Bank of Israel’s Composite State of the Economy Index for May, which showed a 1.8% decline – the biggest since the index was begun in 1998. Over the last three months, the index has dropped about 4%. That figure that points to no less than a 15% drop in annual GDP, although the Bank of Israel wanted against reaching such a conclusion because the data are so volatile right now.
A similar index, designed by Prof. Rafi Melnick, also of the IDC, plunged 11.7% in April, likewise the biggest monthly decline since it was launched. Melnick estimates that Israeli business GDP will decline 5.7% this year, or 7.4% on a per capita basis, the biggest annual drops since the found of the state.
“The debate over an annual budget or a two-year budget is the least important thing right now,” said Melnick. “What is important is the economic program. We’re in an emergency situation and the Finance Ministry is fighting old wars. Policies of the past were designed to achieve two goals – to improve the balance of payments and to eliminate inflation. Those two goals were achieved a long time ago, but we continue to pursue the same policies. New policies need to target improve productivity and increase employment – nothing else.”
One critical program in his eyes is expanding professional training. “The economy that emerges after the coronavirus will not be the one we know. If the unemployed and people entering the job market aren’t trained for the economy’s new requirements, while recognizing the need for productivity improvements we need, unemployment will remain high,” said Melnick.
Treasury officials don’t believe there is any room for tax hikes, even though the budget deficit is ballooning, and Eckstein agrees. “If Israel invests in things that support growth, no one will blame it,” he said in relation to the financial markets. “If these steps being growth, we can adjust the budget – but only when unemployment falls to the area of 4% to 5%. We’re not there.”