Analysis |

Israel Buys Social Peace by Aiming Coronavirus Aid at the Middle Class

Living standards during the pandemic have dropped, but policies have eased the pain for the great middle

Sami Peretz
Sami Peretz
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Stall-owners at the Carmel Market in Tel Aviv, hold up signs reading "Breathe" and "Outdoors = Safe" as they demonstrate against government restrictions, November 17, 2020.
Stall-owners at the Carmel Market in Tel Aviv, hold up signs reading "Breathe" and "Outdoors = Safe" as they demonstrate against government restrictions, November 17, 2020.Credit: Jack Guez / AFP
Sami Peretz
Sami Peretz

It’s said that during an economic crisis, the rich get richer and the poor get poorer. The coronavirus crisis has already generated examples of this and more will come as the pandemic continues. But the fact is that the majority of people are neither rich nor poor but part of the great middle class. What has happened to them during the crisis?

The coronavirus represents a particular acute upheaval – a once-in-a-century crisis – and the best way you can see that is the 200 billion shekel ($60.2 billion) safety net the Israeli government has spread out in order to cope with it. Without the extended jobless benefits, the loans to distressed businesses and eased mortgage payments, Israel would be suffering a much more severe economic and social crisis. A political crisis far in excess of the demonstrations on Balfour Street would have inevitably followed.

If you think of socioeconomic mobility as a kind of real-life version of Chutes and Ladders, that safety net has enabled the Israeli middle class to remain in the game, at least for now.

The middle class was at the center of the 2011 social justice protests and advanced the political careers of those who knew how to ride it – Yair Lapid, Moshe Kahlon and Shelly Yacimovich. The Netanyahu government succeeded in neutralizing the protests by addressing many of the most painful things afflicting the middle class: tax benefits for parents of young children, lower cellphone charges and the Open Skies agreement, which cut the cost of airfare.

In the current crisis, some parts of the economy were much more badly affected than others – in business, it’s been tourism, restaurants and entertainment – and in terms of socioeconomic groups, the middle class and poor. The young were particularly hard hit, but the pain has been salved to a large degree by extended unemployment benefits and the fact that they typically have few dependents or major financial commitments.

Households with mortgages and children don’t have that kind of flexibility and they are having a hard time. A study released by the treasury last August found that the majority of people on unpaid leave were men (53%) over age 35 (53%) who have families (60%) and children under age 18 (49%). On average, their pre-unemployment salaries were much lower than those who still had their jobs.

Those in the lower-income brackets should have an easier time surviving on benefits because the ceiling on them means higher-income earners end up seeing their incomes drop. But those the treasury found were the most pessimistic about finding a new job – evidenced by the fact that they had stopped looking for one – had the lowest average pay.

Three years of rising living standards (as measured by gross domestic product per capita) have gone up in smoke; it will take another two or three years to get us back to where we were in 2019. But that’s on average. Some have preserved their standard of living or even improved it while others have lost more than three years of growth. Among the latter, it’s occurred in the middle class, those in the fourth and the eighth income deciles.

It was this group that the Bank of Israel targeted when it eased terms for mortgage payments. Households with monthly incomes of up to 20,000 shekels can reduce payments by up to 75% if their income has fallen by at least 40%. How did it arrive at this formula?

The 20,000 is about the average/median net household income of mortgage borrowers. The 40% figure reflects bank policy not to grant mortgages whose repayments will eat up more than 40% of the borrower’s monthly income. The bankers reason there won’t be enough left over for other expenses. The plan is designed to help the middle class, not the rich. A household netting 20,000 a month whose income has fallen 40% will have fallen from the seventh decile to the fourth, at the bottom of the middle class.

The middle class has a lot more fixed monthly expenses than just mortgage payments. Why did the Bank of Israel choose to give a break on mortgages? The answer is that it wasn’t just thinking about the needs of borrowers but the health of the banking system and its ability to survive the coronavirus shock.

The number of borrowers who are delaying mortgage payments has reached about 100,000 and the value of lending involved is about 47 billion shekels. That’s a huge figure, enough to undermine the entire Israeli banking system were these borrowers to default. The Bank of Israel aims to prevent that by buying borrowers time.

The solutions the government and the Bank of Israel have created seem to be working, even if they will have side effects like rising poverty, widening income gaps, financially struggling households and a growing underground economy.

The government’s focus on the middle class has a political dimension, too. Research by Prof. Momi Dahan of the Hebrew University shows that the lower-income deciles support the Haredi parties and the Arab Joint List. Kahol Lavan and Yesh Atid are supported by the upper deciles. The middle deciles tend to vote for the Likud.

Those who wonder why the protests against Prime Minister Benjamin Netanyahu have focused on his criminal indictments and not on socioeconomic issues need only look at the way aid is being handed out. The government is handing out money and benefits to the middle class. The political problem will only come when it comes time to pay for all this.

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