Analysis

Israel's Economy Needs Stability and Long-term Planning, but Netanyahu Needs the Exact Opposite

Netanyahu can't fight the coronavirus, an economic crisis and criminal charges all at once

Sami Peretz
Sami Peretz
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Prime Minister Netanyahu wears a protective mask as he holds a weekly cabinet meeting at the Foreign Ministry, Jerusalem, July 5, 2020
Sami Peretz
Sami Peretz

There was only one good reason for the establishment of the unity government – to handle the health, economic and social aspects of the coronavirus crisis. But the coalition is failing out of its course in pandemic management, and all Israelis will be forced to pay the price, in the form of a more-prolonged crisis.

When the pandemic broke out in Israel this spring, the Finance Ministry and the Bank of Israel were counting on the economy reopening by the end of June. Economic activity would return to normal levels, and the hundreds of thousands of employees who were placed on unpaid leave would be back to work.

Israel's Locked-down, Let-down Youth Rattles Netanyahu's Cage. LISTEN

July is nearly over, however, and record numbers of new COVID-19 cases have been reported around the world, including in Israel, according to the World Health Organization.

It’s true that the government has finally appointed a coronavirus czar, Prof. Ronni Gamzu, to manage the crisis. But even the best intentions and the best people can’t necessarily bring the required results. Governmental culture is about bureaucracy and power struggles. An inflated cabinet is plagued by more than the usual amount of political intrigues and out-of-touch ministers.

The government has taken steps to contain the virus and keep the economy afloat, but Israel is nevertheless marching in the direction of a prolonged economic crisis. That’s not because of the coronavirus itself but a political environment where the government is incapable of focusing on the task for which it was created.

Prime Minister Benjamin Netanyahu claims he doesn’t want another general election, but he is doing everything he can to leave himself the option of calling one. The option of an early election was behind his demand to draw up and pass one budget for the remaining months of 2020 and a second one for 2021, later this year.

In the past Netanyahu favored two-year budgets – and once even proposed a three-year budget – to ensure a stable coalition and avoid the risks that a vote on the budget could bring down the government.

Israel needs political stability more than ever today. In this turbulent time we need to pass a budget covering the rest of this year and all of the next, together with the reforms in the Economics Arrangements Bill, supplementary legislation to the national budget. That will lift the cloud of uncertainty the public and businesses are under.

But Netanyahu is managing the crisis according to the requirements of his personal crisis – the corruption trial that’s due to resume in December and will occupy three days of his workweek. He’s worried that the High Court of Justice may even rule he can’t remain in office. Netanyahu wants personal stability.

This conflict of interest raises serious questions about his ability to lead the country and manage such a serious crisis. The country’s situation demands a stable government; the prime minister’s situation looks at elections as an intriguing option that might yield him a religious-right government that would allow him to fire Attorney General Avichai Mendelblit or pass legislation sheltering him from the court.

Netanyahu’s legal situation requires coalition instability and tension and mistrust between himself and Benny Gantz, the alternate prime minister and Kahol Lavan party leader. But those are precisely the conditions that will delay the economy’s recovery from the coronavirus crisis. And that is before the winter begins and the risk of another wave of infection.

The budget affair is what is likely to bring down the government. If a budget isn’t approved by August 25. Gantz is insisting on a two-year budget, as the coalition agreement calls for. If he doesn’t get it, Gantz can be sure that his turn to take over the premiership in November 2021 under his rotation agreement with Netanyahu will never come.

From the day the Netanyahu-Gantz coalition was formed the odds of the rotation ever occurring were slim. The hope was that the two would decide that their mutual interest in dealing with the coronavirus would outweigh other interests. It didn’t happen and that has led to dubious policies such as the 6.5 billion shekel ($1.9 billion) grant program to send every Israeli a check whether he or she needs it or not. It was an obvious ploy to win favor with voters and take some of the steam out of the street protests.

Relative to the other programs the state is spending on the coronavirus, an amount that would reach 200 billion shekels, the universal grant allocation is small. But the way it was done reveals recklessness and unprofessionalism (Netanyahu ignored the advice of the treasury and the central bank) in favor of politics and turning Netanyahu into a nice and generous man that hands out money to the public in its time of need.

It’s not the first time that has happened. In the previous government, Netanyahu and his then-Finance Minister Moshe Kahlon had opposed paying out a salary supplement to compensate police offices and others in the security establishment the “absence of employment security,” meaning equalizing their pay to that of career soldiers. However, neither of them wanted to be seen as nasty men and they went ahead and approved a 22 billion shekel payout.

In his current legal situation, Netanyahu can’t make difficult decisions. The economic pain that he administered during the lockdown in March and April reduced his political freedom of action. We saw that in the restaurants affair, when Netanyahu ordered them to be closed but quickly retreated when he saw that restaurateurs were rising up in rebellion. We saw it again when Likud lawmaker Yifat Shasha-Biton, the chairwoman of the Knesset coronavirus committee, refused to approve his shuttering of gyms.

The latest Bank of Israel forecasts shows that the government’s deficit will reach 12% of gross domestic product this year and that GDP itself will contract by 6%. Between 500,000 and 570,000 Israelis are unemployed or on unpaid leave, the central bank says, on top of the 150,000 who were jobless before the onset of the pandemic. In May, a fifth of all self-employed Israelis had lost all or part of their income.

These problems can’t be solved if the government’s horizons are just a few weeks. If it is, the government will inevitably make reckless and lousy decisions and void the difficult ones (such as reforming the civil service, which could save the government 45 billion shekels). In the last week, until the cabinet approved the plan on Sunday, the treasury was preoccupied not with the state budget but with how to tinker with the universal grant program.

Netanyahu has no few achievements to point to in economics. As finance minister in 2003-05 he undertook a program of necessary but unpopular reforms. In his years as prime minister since 2009, he has maintained fiscal discipline.

Now that Netanyahu is faced with the unprecedented crisis of the coronavirus, fiscal policy has to undergo an about-face and become expansive in a big way. But that requires spending intelligently, not politically and thoughtlessly.

It’s pretty evident already that many sectors of the economy, most notably travel and tourism, will take a long time to recover. World trade may also suffer for a prolonged period as countries favor local industry to ensure jobs (even Netanyahu has called for buying “blue and white”). The International Monetary Fund has warned that the world faces a period of chronic unemployment, growing income inequality, unstable financial sectors and a wave of bankruptcies. It urges governments to strengthen their public health mechanism to help cope with the economic impact of the pandemic.

The problem is that in Israel Netanyahu’s legal problem can’t be removed from the IMF’s recovery formula. It’s always there, it creates suspensions about his every move and encourages short-term thinking. It threatens to make the coronavirus longer and more painful in Israel than it needs to be.

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