Israeli Government Faces Daunting Task Coping With Coronavirus Economic Fallout

Its challenges include a massive budget deficit, record high unemployment and a tourism industry that is all but dead

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A demonstration by self-employed workers in front of the Knesset in Jerusalem.
A demonstration by self-employed workers in front of the Knesset in Jerusalem.Credit: Ohad Ziegenberg

With the new government finally sworn in on Monday, its first big task will be grappling with the coronavirus and the damage it has wreaked on the economy.

Prime Minister Benjamin Netanyahu said the government would form a separate coronavirus cabinet to cope with any second wave of contagion and pass a budget of “hope” to help the economy rebound from the lockdown.

The key challenges are the budget, state assistance, employment and tourism – the latter the industry most badly hurt by the global pandemic.

Only a few months ago, it seemed like this biggest challenge facing the next finance minister would be bringing down Israel’s swelling budget deficit. But the coronavirus pandemic has turned everything on its head. Now, say most economists, the government needs to step up spending and widen the deficit even more to keep the economy afloat.

The result will be that 2019’s deficit of 3.7% of gross domestic product will be puny compared to what’s ahead – a deficit about triple that size.

Meanwhile, the tasks that the previous finance minister, Moshe Kahlon, gave priority to, first and foremost engineering a drop in housing prices, have fallen far, far down the agenda. For his successor, Yisrael Katz, the first thing he needs to do is rescue the economy from the coronavirus crisis.

In recent days, the Finance Ministry has announced it plans to increase the package of government aid to the economy to 100 billion shekels ($28.3 billion) from the original 80 billion. Even if all that money in the end in actually spent (so far only a small part of it has been disbursed), many businesses will not survive. The economy could be licking its wounds for a long time to come. That will especially be the case if the jobless rate remains high.

Israel's new Finance Minister Israel Katz .
Israel's new Finance Minister Israel Katz .Credit: Eyal Tuag

The government’s efforts to return the economy to normalcy will put Katz on the battlefront with a long list of powerful interests – big retailers, the airline industry, teachers, doctors and the nonprofit organizations. The first stage of the coronavirus saw the treasury pledging money left and right, often with the backing of the Prime Minister’s Office and against the advice of the senior treasury staff. No one knew where the tens of billions of shekels were going to come from.

But eventually, that will change. The international credit rating agencies Moody’s and Fitch have already expressed discomfort with Israel’s fiscal policy.

One of the biggest dilemmas Katz will face is timing, i.e., when to turn off the spigot of spending and begin to focus on bringing down the budget deficit to a more reasonable level. Even setting the deficit target for the 2021 budget, for which he has 90 days, will be no small matter.

Austerity ahead

When the day arrives, it will mean austerity policies in the form of tax hikes, rescinding of tax benefits or efficiency steps in the public sector. In normal times, it is new governments with the threat of election a long way away that are most capable of taking such difficult steps, but in the immediate post-coronavirus era, austerity would be a disaster. Thus, Kahlon’s legacy of more spending and less taxes may remain with us for some time.

There’s a well-known rule about never spoiling the opportunity of a crisis. A crisis can be the time to correct structural problems in the economy, especially by making reforms aimed at increasing productivity and competition that would in ordinary times take years to implement. But the window of opportunity isn’t going to be open for long and the sense of urgency will soon evaporate.

Or maybe it never opened, according to Omer Moav, a professor of economics at the Interdisciplinary Center at Herzliya.

“No one is going to take advantage of the crisis to make vital reforms,” he told a round table held last week by the Aaron Economic Policy Institute. “In contrast, economists’ recommendations to spend more money will be gladly accepted. A crisis is an opportunity, but the opportunity will not be used this time.”

Labor pains

Bringing down the sudden rise in unemployment created by the coronavirus lockdown is the new government’s top priority. The Bank of Israel estimates that the jobless rate will more than double from 3.8% pre-crisis to 8% over the medium term. Most of the Israelis now collecting jobless benefits are officially on unpaid leave, but many of them are not expected to be going back to their jobs anytime soon.

During the crisis, workers in the professions usually succeeded in holding onto their jobs, even if their employers’ business had ground to a halt. They could work from home or be assigned special projects. Public sector workers, with their powerful unions, continued to get paid no matter what.

For lower-skilled sectors of the labor market – 60% of those put on unpaid leave were women earning low pay – the government offered an accelerated introduction of the professional retraining programs that were originally to be part of the government’s 2030 plan. Some 100 million shekels has been budgeted for it, but if the crisis dissipates quickly that money may never get spent.

Israeli Arabs also require targeted spending. There jobless rate right now (counting people who were laid off and put on unpaid leave) is 40%, versus an overall rate for all Israelis of 25%. The collapse of Arab businesses, most of them small enterprises, will make it harder to reduce joblessness in the sector, especially for women. Budget strains in Arab local authorities will have the same effect.

One big change that may be coming to the labor market is greater use of work at home, which could help reduce the pay and job-quality gaps between the center of Israel and the Negev and Galilee peripheries.

The public sector, which has long resisted productivity improvements, may show more flexibility in the post-crisis era. Arnon Bar-David, the Histadrut labor federation chief, understood the extent of the crisis and agreed that 70% of the civil service would accept going on mandatory vacation (i.e, the time off will come out of their vacation days).

The question is whether Bar-David will show the same flexibility on longer-term issues, such as introducing more technology into government offices without insisting that the state compensate workers financially every time. Likewise, whether unions will compromise more on human capital issues, such as higher pay for younger and lower-paid workers.

That will hinge as much on Ben-David’s attitude as it does on the willingness of the incoming labor minister, Itzik Shmuli. Shmuli began his political career in the 2011 social-justice protests and has since shown sensitivity to social justice issues. How that will impact his labor market policy has yet to be seen.

Bringing back tourists

On the eve of the coronavirus crisis, Israeli tourism was enjoying its best year ever – 4.5 million visitors had arrived in 2019, an 11% rise over the year before. By last month, when the lockdown was at its peak, a mere 600 people arrived at Ben-Gurion International Airport. The worst of the travel restrictions have been ended, but that still leaves the tourism sector the difficult task of luring back Israeli and foreign vacationers.

With foreign travel still largely paralyzed, the Tourism Ministry’s first job will be to try and revive local tourism, notably the hotel sector. At the peak of the crisis, 96% of Israel’s hotels were shuttered (the rest were housing coronavirus patients) and 37,000 of its 42,000-strong industry payroll were fired or on unpaid leave.

Hotel industry sources estimate that it will take two to five years to reach 2019 levels. To even get started, the industry needs explicit directives from the Health Ministry on the conditions they have to meet to reopen, such as cleaning and hygiene rules and what facilities can be used by the public (swimming pools and dining rooms). Without the latter being reopened, the hotel business can’t survive.

A youth rests on a pile of beach chairs at a beach in Tel Aviv closed over coronavirus, Israel, Tuesday, March 17, 2020.
A youth rests on a pile of beach chairs at a beach in Tel Aviv closed over coronavirus, Israel, Tuesday, March 17, 2020.Credit: Oded Balilty,AP

The treasury will also have a role as a source of government aid for the beleaguered sector. The coronavirus closure left hoteliers with heavy losses, but at this stage no one knows how much aid they will get and whether it will be disbursed as a loan, grants and/or in lower taxes and easier regulations.

Eilat presents a special challenge. Tourism accounts for 80% of the southern resort town’s economy and is home to 12,000 hotel rooms. Most of its residents either work in the hotels or in other businesses that revolve around tourism. Thus, the Tourism Ministry wants to focus first on luring more Israelis to Eilat as soon as the Shavuot holiday ends May 29.

But without foreign tourism, the hotels in Israel are going to have a hard time achieving occupancy rates of more than 50%, the minimum rate they need to make it worth their while to reopen. So, the second stage of the industry recovery will focus on foreign tourists.

Besides the obvious tactic of resuming overseas marketing, the Tourism Ministry hopes to get a lead on rival Mediterranean destinations by opening its gates to tourists first. Another tactic is to stage events, such as concerts and sports matches, that attract visitors.

Airlines, of course, have to resume flying to Israel. At the peak of the crisis, the number fell to just three foreign carriers. Officials are trying to encourage more of them to resume flights but the going has been slow. One option they are considering is reviving the subsidies Israel gave to airlines flying into Eilat in 2015, after the Gaza war the year before had taken such a toll on incoming tourism.

The Tourism Ministry is also calling for the three Israeli airlines – El Al, Arkia and Israir – to be allowed to merge to ensure their survival. However, the decision on whether to allow that is not the ministry’s to make.

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