Netanyahu’s Rudderless Economic Policy

Missed opportunities characterized last four years of government.

Four years of Benjamin Netanyahu as prime minister and economics supremo, with Yuval Steinitz co-starring as finance minister, have ended with a sense of missed opportunity.

With a broad and stable coalition and a global economic crisis facing them when they took office, they could have achieved a lot more than simply avoiding pitfalls.

In fact, management of the economy was sacrificed to short-term considerations, politics and the absence of grand vision. People protested in the streets and a committee was formed to address their grievances. Home prices rose and the tax laws were changed. Protests against African migrants led to the construction of a detention camp.

The government’s two biggest failures were 2012’s massive budget deficit and skyrocketing housing prices to which the solutions were an early election and the appointment of Moshe Kahlon, the hero of cellular reform, as chairman of the Israel Lands Administration. All told, the record was mixed.

1. Stock market rose 68%

Netanyahu and Steinitz took office on March 31, 2009 the height of the global economic crisis as world stock markets languished at historic nadirs. Just then they began to surge, and by year’s end the Tel Aviv Stock Exchange had climbed more than 60%. The market registered a 15% gain in 2010 but has since dropped 5%.

The stock market may have risen 68% during the latest Netanyahu government more than in Europe and less than in the United States but the past two years haven’t been good for Israel’s capital market.

2. Dollar fell 10%

The dollar/shekel graph during the Netanyahu/Steinitz regime is nearly a mirror image of the stock market graph. In April 2009 the dollar reached a NIS 4.22 peak and started diving once it was clear the financial world wasn’t crumbling and Federal Reserve Chairman Ben Bernanke began pouring hundreds of billions of dollars into the markets. The dollar continued sinking until falling below NIS 3.40 in mid-2011. The Bank of Israel struggled to prop up the sagging greenback, with some success, to stimulate exports.

3. Just 11% inflation, but housing prices soared

Price stability was maintained during Netanyahu’s term, due in part to the weakening dollar and the economic slowdown, but the people didn’t feel it. While cell phone rates plunged, housing prices soared by more than 40%. This hit multitudes of young couples hard, forcing them to mortgage their futures for an apartment in a reasonable location one of the main factors eroding the middle class. But it also stabilized the economy and boosted tax revenues. The third Netanyahu government’s big test will be in housing.

4. Bank of Israel rate rose and fell

The interest rate was at rock bottom, 0.5%, when Netanyahu took office due to the global economic crisis. Over the next two years the central bank raised it to 3.25%, mainly because of soaring real estate prices.

With the deepening crises in Europe and the United States, the Bank of Israel began paring down the rate in July 2011 until reaching its current 1.75%, a drop also made possible by the government keeping to its budget in recent years.

5. Fall of the tycoons

Enormous debts and collapsing asset values brought down most of the tycoons who leveraged themselves during their prosperous years. Yossi Maiman, Ilan Ben-Dov, Nochi Dankner, Moti Zisser, Lev Leviev and many others lost most of their assets over the last four years.

Their collapse obviously wasn’t caused by Netanyahu but was self-inflicted. There was plenty of damage to pension savings that can’t be undone, but more will follow if Netanyahu and regulators don’t learn the necessary lessons.

6. Enormous deficits

The government of Ehud Olmert and Finance Minister Roni Bar-On managed to finish 2007 with a balanced budget, but the 2008 crisis turned a 2.2% surplus into a 5.1% deficit. In the following two years the Netanyahu government reduced the deficit to 3.8% and 3.3%. Last year, however, the deficit mushroomed to 4.2% more than double the government target.

In sum, the budget discipline inherited by Netanyahu and Steinitz is now being willed to voters with no restraint whatsoever and an enormous NIS 39 billion deficit. With an excess of future commitments, the budget negotiated in coalition talks will require painful cutbacks and tax hikes.

7. Lower unemployment

With unemployment at 6.9% at the end of 2012, Israel managed to avoid the employment crisis plaguing parts of Europe and connect with the recovering labor market in the United States. This is one of the greatest achievements of Netanyahu’s economic policy.

8. Declining growth

The 1.1% growth rate in 2009, due to the global crisis, was followed by a jump to 5% the following year. But growth has since steadily declined: 4.6% in 2011 and 3.3% in 2012. It may not look as bad as the situation in Spain or Greece but it’s nothing to brag about.

AP
Daniel Bar-On