Analysis

Coalition Spars Over One or Two-year Budget, and Israel's Economy Waits

Ninety days into new government, no progress has been made on passing a two-year national budge as deadline approaches

Hagai Amit
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Benny Gantz (L) and Benjamin Netanyahu at a government meeting, Jerusalem, May 31, 2020.
Hagai Amit

In mid-August, it will be 90 days since Israel’s 35th government was sworn in. The coalition agreement on which it’s based gives August 15 as the deadline for passing a two-year national budget. If that doesn’t happen, the government will be dissolved and the side that blocked the budget will cede the position of prime minister to the other side until a new election is held.

So far, no progress is being made on the budget. Likud, led by Prime Minister Benjamin Netanyahu and Finance Minister Yisrael Katz, is demanding that the budget be for one year only rather than for two.

Alternate Prime Minister and Kahol Lavan Chairman Benny Gantz is struggling to understand the implications for the Israeli economy of the cabinet and the Finance Ministry professionals arguing for two months, each with their own demands, over the 2020 budget – which will be finalized four months before the end of the year – only in order to return to the table for another round over drawing up the 2021 budget before January.

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Netanyahu and Katz explain that given the fluid state of the economy at the moment, it’s too early to draft a state budget for 2021, which could be a year of economic recovery or, alternatively, a year of economic collapse should the coronavirus make a roaring return.

In a discussion Thursday with top Finance Ministry officials, the latter backed Katz, as did the governor of the Bank of Israel, Amir Yaron. Everyone wants to start off their relationship with the new finance minister on the right foot. But the explanation of economic uncertainty is problematic, given that even come fall we won’t know what the coronavirus plans are. Even in January 2021 we probably will all be living in fear of a renewed outbreak come March.

The idea of a two-year budget in the coronavirus era would be about giving the economy some form of stability and farsightedness. The budget is supposed to determine events, not be dragged along by them. For the self-employed, for instance, it helps to know now what type of safety net they’ll have, regardless of whether the virus makes a return. In addition, the coalition agreement states clearly that the budget will be updated throughout the duration of the government in keeping with the state of the pandemic and its economic implications, specifically at the beginning of 2021. If that weren’t enough, a particularly large budget reserve could be set aside in a two-year budget to allow for economic developments.

Coalition chairman Miki Zohar of Likud has taken Kahol Lavan’s side in the conflict. “I believe that at this point it’s better to pass a two-year budget,” he told TheMarker. “Because of the coronavirus crisis, it’s important to plan longterm measures. If needed, things can be changed as we go. But in our situation, after you know you’ve spent no small sum on the coronavirus crisis, you have to plan forward. Particularly after you increased the national debt you need to know how you’ll be able to pay it back.”

Zohar found himself in a head-on confrontation with Katz last week, after Katz objected to a bill Zohar had proposed that would have limited credit card companies’ capacity to enter the insurance industry and boost competition. At Netanyahu’s request, the two agreed that the proposal would be raised for discussion in the Ministerial Committee for Legislation on Sunday. It didn’t happen. “I’m still trying to draft a majority within the committee. Some six out of 14 members support the proposal, and eight are considering it. I’ll bring it up for discussion when I know I have a majority,” Zohar said.

It’s not just Zohar’s measure, designed to protect thousands of insurance agencies that fear additional competition in their field, that may vanish. Transportation Minister Miri Regev proposed a week ago to El Al’s management that as part of the government’s rescue plan for the airline, it transfer maintenance of its Boeing fleet from Lufthansa in Germany to Israel Aerospace Industries. But that plan has low feasibility and doesn’t appear in the company’s bailout at the moment.

Likud MK Miki Zohar at a Knesset meeting to discuss Netanyahu's immunity request, February 17, 2020.
Likud MK Miki Zohar at a Knesset meeting to discuss Netanyahu's immunity request, February 17, 2020.Credit:

Two-party budget

Passing the budget entails passing the Budget Law; the Economic Plans Law, which entails proposed structural changes to the economy and the Economic Arrangements Bill (hok hahesderim), supplementary legislation to the budget.

Over the past year, much attention has been paid to the limitation the governments faces when operating without a budget – in this case, the government is limited to monthly budgets equal to 1/12 of the previous year’s budget. However, the lack of economic and legislative reforms are more damaging to Israel’s economy.

If an annual budget is passed, Finance Ministry officials predict that the accompanying economic plans for 2020 will be limited. As a result, necessary reforms will have to wait for the 2021 budget.

Ultimately, Israel would do well to have a budget of either type. The delay certainly reflects the lack of trust between the two senior coalition partners.

Gantz and Netanyahu have had an easier time coming to agreements on annexation in the West Bank or on legalizing recreational marijuana than on the budget. Gantz is having a hard time believing that the changes Netanyahu wants to the coalition agreement stem from economic considerations. He fears that Netanyahu wants to leave himself an escape clause to dissolve the government in another six months, when the sides meet to discuss the 2021 budget. Gantz may agree to an annual budget only after the coalition agreement is amended to block Netanyahu from breaking up the government under such a scenario.

In order to understand the importance of the budget and its economic plans, this is a draft list of reforms discussed during work on the last Arrangements Bill, in 2018. It includes many significant reforms that would help consumers, including differential insurance rates for builders depending on their safety record, in response to the large number of deaths on construction sites; a proposal to ease the intolerable workload in the country’s courts; a proposal to make it easier for high-tech companies to hire foreign employees, in a bid to jump-start Startup Nation’s engine of economic growth; and an attempt to address corruption in local governments by excluding elected officials from Request for Proposal committees in favor of professionals.

For the past few months, the treasury has been working on proposals for the Arrangements Bill. In addition to the reforms mentioned above, which it hopes to include in the 2020 budget, are other demands. Kahol Lavan wants economic incentives for the self-employed, increased government oversight and funding for preschools for children ages 0-3, funding for the LGBTQ community and fixed grants to communities on the northern border.

Katz wants to reduce import tariffs aimed at protecting Israeli agriculture, including for produce and for dairy products. Agriculture Minister Alon Schuster of Kahol Lavan would also like to see a gradual switch to a policy of direct assistance for farmers, instead of protective tariffs. The big question is whether during the coronavirus era the government can find hundreds of millions of shekels for direct aid as part of a bid to increase competition and decrease prices paid by consumers.

And we haven’t even mentioned the demands of the ultra-Orthodox parties, which signed agreements with Likud guaranteeing funds for religious education institutions.

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