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Israel Is Marching Into a Coronavirus Recession With No Armor

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Prime Minister Benjamin Netanyahu chairs the weekly cabinet meeting in Jerusalem, March 8, 2020.
Prime Minister Benjamin Netanyahu chairs the weekly cabinet meeting in Jerusalem, March 8, 2020. Credit: REUTERS

By almost everybody’s assessment, Benjamin Netanyahu is the luckiest man alive. That’s because the failed economic policies he led over the past decade are likely to send Israel into a deep recession. But Netanyahu will have the perfect scapegoat to blame for the downturn in the form of the coronavirus.

The government’s already big budget deficit, approaching 4% of gross domestic product, may balloon as the epidemic wreaks havoc on the economy. But the impact of the coronavirus will both mask Netanyahu’s responsibility and hinder the government’s efforts to grapple with the downturn.

I asked the Israel Tax Authority this week if there were any plans to help the business sector weather the epidemic by letting companies delay advance tax payments.

That’s one of the most popular ideas now circulating among officials, a substitute for the budget we don’t have (because the three general elections prevented the Knesset from approving one). Tax payments are one thing the government can manage without for a limited period and help businesses whose cash flow has been squeezed by lower revenues and uncertainty. Delaying payments would be akin to a loan to the private sector by the state.

The party at the other end of the phone line couldn’t help contain his laughter. “To delay tax prepayments? It won’t be long before there won’t be any taxes to pay them on,” he said. “Open your eyes. The way things look right now, businesses are about to start making losses and there won’t be taxes to pay at all.”

Deliberations about whether to start paying compensation to businesses stung by the coronavirus or to workers forced into quarantine took a scary turn over the weekend: the question of whether Israel is heading into a recession. The Tel Aviv Stock Exchange, which until now had taken a neutral position on the matter, showed that it, too, is worried that the public health crisis will lead to a global economic crisis – one Israel isn’t prepared for.

Israel isn’t ready because its recession toolbox is empty. First, for more than a year there has only been a caretaker government. The budget is last year’s spending package divvied out on a month-to-month basis; creating a more expansive budget to deal with a slowdown would require special legislation.

Netanyahu talks like a prime minister in charge, consulting with other world leaders on how to handle the coronavirus, but actually he lacks the authority to act on the epidemic through one of the main tools a government should employ: fiscal policy. His insistence on trying to hold on to power will do Israel a lot of damage.

Second, and worse, Israel is going out to battle with the recession threat without the means of defending itself. The Bank of Israel has almost no room to use interest rates because its lending rate has been so low since the 2008 global financial crisis. Combined with the big budget deficit, which limits the use of fiscal tools, his warriors have no weapons.

The only thing in Israel’s favor is its low 60% ratio of debt to GDP. But, as we have learned in the past, a comfortable debt level can quickly turn high when the economy deteriorates.

We can picture how the situation will develop based on experience. Twice in the past 20 years, Israel stood on the precipice of recession. Both times, Israel entered the crisis from the best possible position, with a tiny or nonexistent budget deficit and declining debt ratio.

The first was in 2000, as a result of the combined effect of the dot-com bust and the second intifada. The budget deficit zoomed from 0.5% of GDP to 3.9% within a year and reached 4.3% in the second year. The national debt climbed from 80% to 93% of GDP.

The second was in 2007. The deficit that year was exactly nil and in the first half of 2008 the government actually ran a surplus. Then the global financial crisis exploded and Israel’s deficit jumped to 4.8% in 2009. And all this happened without a real recession ever arriving in Israel.

The bottom line is that a global economic crisis is likely to cost us a deficit of 4% at least. In the previous two incidents, Israel could allow itself to act fiscally and expand its deficit to 4% or even 5%. With the coronavirus, we start at 4%. That means that if it becomes a real economic crisis, Israel’s fiscal deficit could reach 8% or even 9% of GDP.

The legacy of Netanyahu economics will be a deficit of national bankruptcy. But as luck will have it, the onus won’t fall on him even though it was Netanyahu who didn’t prepare Israel for the crisis. His evasions may good for him, but they will do nothing for the rest of us.

Faced with a giant deficit, the government won’t be able to pay such generous aid by delaying tax prepayments or setting up compensation funds. Rather, Israel will have to take the same kind of measures it did in 2001-03 – severe budget cuts to keep overspending from getting out of control and win the confidence of the financial markets.

The treasury is now preparing a fiscal contingency plan, most of which deals with how to spend as little as possible to save for the risk that the crisis will only get worse. As it is, the old-new budget doesn’t allow much room for flexibility and will be pressed to make resources available for the health care system. There won’t be much left over.

There won’t be much more for compensation payments to coronavirus victims. What there is will go to companies on the verge of collapse such as El Al Airlines, but even that aid will be subject to strict limits. El Al will be asked to provide a tough-minded recovery plan that includes trimming the fat of high salaries for pilots as a condition for the help.

The tourism sector will also have to meet conditions; for instance, a commitment to lowering hotel rates as a way of luring Israelis into rooms at a time when foreign arrivals are down sharply.

In any case, whatever aid, there won’t be actual cash but government guarantees to enable companies to repay or delay repayment of debt. And the recipients will have to show that their problem is really the coronavirus and not the function of a longer-term problem. “The crisis will be an opportunity for streamlining and improving things. It shouldn’t be wasted on state philanthropy,” a Finance Ministry official said.

And, to be sure, there are some positive aspects to all this. At least everyone understands that there’s no money, and there’s no pressure coming from the big tycoons as there was in 2008. That will let the experts design the steps the government takes and avoid mistakes.

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