Analysis

Israel's Election Is Over. Now, Where’s the Money to Pay for the Promises?

The cupboard is bare and coronavirus looms large, but politicians vowed no new taxes

Meirav Arlosoroff
Meirav Arlosoroff
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Nir Barkat gestures after speaking to the media at the Likud headquarters in Tel Aviv, March 2, 2020.
Nir Barkat gestures after speaking to the media at the Likud headquarters in Tel Aviv, March 2, 2020.Credit: Ofer Vaknin
Meirav Arlosoroff
Meirav Arlosoroff

Where will the money for the budget come from? That’s what Nir Barkat and Ofer Shelah, Likud and Kahol Lavan’s candidates for finance minister in the next government respectively, were asked before Election Day.

One of them answered: “From a growing economy – in the next 10-15 years, thanks to its human capital, technology, entrepreneurs and innovation, Israel enjoys excellent conditions. If we can learn how to leverage it, growth will generate a lot of money.”

The second one answered: “The main answer is growth – smart investment, fewer regulations and bureaucracy will encourage fast economic growth that will boost government revenue and cover the deficit and fund new programs.”

Do you know which man said what? It really makes no difference because they both provided almost identical answers. Both vowed not to raise any taxes, except maybe the health tax by a little. Shelah proposed taxing multinational internet companies that work in Israel, but he promised not to raise personal, or corporate tax rates, to do away with exemptions for of advanced-training funds.

Barkat went further and vowed no tax hikes at all. A freer market and natural gas revenues will cover all our future tax revenue needs, he feels.

Politicians are famous for making unrealistic promises on the eve of an election only to forget about them the day after. But the day after has now arrived and even if that exact composition of the next government remains unknown, the monetary promises of both prospective finance ministers can already be dismissed as fantasy.

The treasury last week issued a report on the potential impact of the coronavirus on the economy. Its most optimistic scenario, which posits that the virus will behave like the flu and fade away by the summer, estimates the damage to the economy at 2 to 3 billion shekels ($580 million-$870 million), or about 0.2% of gross domestic product.

The middle scenario, in which the epidemic continues for a year or more worldwide but not in Israel, sees global supply chains disrupted, the stock market and investment falling, and the global high-tech industry slowing. In that case, the damage to Israel will be in the order of 15 billion shekels, or 1% of GDP.

There’s also a worst-case scenario, whose cost the treasury didn’t even try to estimate. In that case, Israel is impacted directly by the virus and the Health Ministry imposes lockdowns on large parts of the country. If the lockdown includes Israel’s biggest cities – Tel Aviv, let’s say – the economic toll will be enormous.

The uncertainty surrounding coronavirus and its economic costs remains high, but we can be far more certain that Israel is vulnerable economically. To cope with a global slowdown, the government would need to spend more money and allow its fiscal deficit to grow to counter its impact, but there is no budget money available because the outgoing government spent so liberally. Israel has too big a deficit already to employ the budget as a shock absorber.

In 2019, the deficit was 3.7% of gross domestic product and, according to the latest estimates, it will grow to 3.8% this year and to 4.2% in 2021. To get a sense of the risks the deficits present, let’s go back to the last global financial crisis in 2008. Israel entered the crisis period with a zero deficit but within a year the red ink grew to 4.8% of GDP. And that was at a time when the new government – Netanyahu’s second – was functioning efficiently.

If the global economy sinks into a recession like it did a decade ago, Israel’s budget deficit could rocket to 9% or more. That’s the deficit of a country moving toward economic oblivion. Whatever Barkat says about the Israeli economy’s “excellent” condition, a deficit of that order could bring collapse.

Over the top.

The previous Netanyahu government’s economic irresponsibility is going to cost us dearly. However, inside Likud there’s complete denial and Kahol Lavan is sharing this problem as well.

Both parties say there’s no need to raise taxes, even though the deficit is on the path to 4% of GDP even before the impact of coronavirus has been felt. How will the next government manage without raising taxes? Even in a normal environment, without epidemics, economic growth would not be able to bring down the deficit. They are telling the public a lie.

The big difference between the two prospective finance minsters lies in their attitude toward the ultra-Orthodox.

One of them said: “Vis a vis the Haredim, the issue is employment – but not employment by force or by reducing budgets [to the community] but by good intentions. We need to help them through professional training and a relevant education in English and mathematics – not via the yeshivas but by external dedicated training centers. We won’t reduce the yeshiva budget. I believe in living together while understanding the other’s needs.”

The other said: “The solution is simple – a core curriculum that enables Haredi men to enter the job market. Core studies from the youngest ages, linked to the early-childhood education revolution we want to undertake – free education from birth.”

Ofer Shelah speaks at a conference in Tel Aviv, June 12, 2017.
Ofer Shelah speaks at a conference in Tel Aviv, June 12, 2017.Credit: Olivier Fitoussi

It should be clear which candidate said what. Barkat, a former mayor of Jerusalem, is accustomed to horse-trading with the ultra-Orthodox. He takes the view that things can stay the way they are, without enforcing a core curriculum and state funding of their yeshivas. Everything will take care of itself. But in the most generous interpretation, the Barkat vision is a misrepresentation; in the least generous, it’s a bald-faced lie.

Shelah, by comparison, is more honest and daring, by insisting on the core curriculum. But where would the money come from for his free early-childhood education plans?

The election is over and now comes the blood, sweat and tears. It’s time to sober up, remember that there is a country here to manage, and stop the senseless hassles. Israel is in real budgetary distress and is in poor shape to face a global crisis, if it comes. An additional problem is the Netanyahu governments’ criminal neglect since 2009 of meeting a need for structural reforms, which have intensified some of our acute economic problems, as well as a failure to address the ultra-Orthodox challenge.

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