“Having a two-year budget, for a year and a half, means making very big cuts and issuing decrees because [when you write a budget] you have to deal in hard numbers. We have already committed to a lot [of spending] and we still don’t know where this will take us.”
That warning was issued by Prime Minister Benjamin Netanyahu this week during a stormy meeting of the Likud Party. His closing words – “This isn’t the time for budget cuts, it’s the time to get money to the people” – is a view widely shared by economists, even the Scrooges who work in the Finance Ministry budget division. But the options that Netanyahu presented – a one-year budget approved by the Knesset as soon as possible versus a two-year budget full of spending cuts – has no connection to reality.
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As it is, spending in 2020 has already exceeded limits by more than 20% through emergency orders to deal with the coronavirus pandemic. If there are going to be spending cuts in the 2021 budget, they will be the result of a government decision. But no one right now is even recommending such a move, certainly not today and even going well into next year. The coronavirus isn’t going away anytime soon. The kind of fiscal discipline Netanyahu is so proud of from his term as finance minister over 15 years ago isn’t relevant when the Israeli economy is deep in crisis.
The Bank of Israel, for example, doesn’t think 2021 will be a year of spending cuts. Its latest projections see no decline in public sector consumption next year, rather a 2.5% increase. That follows a 4.5% increase this year (not counting defense imports) before taking into account the 6.7 billion shekel ($2 billion) universal grant program, which will cost 0.6% of gross domestic product, and the extra spending on education.
The consensus not just in Israel but throughout most of the world is that government spending will remain high for some time. Among 30 developed economies surveyed by the credit rating agency Standard & Poor’s, just six are expected to run a fiscal deficit of less than 2% of GDP in 2021 or even run a surplus. Four of them are rich and small – Switzerland, Norway, Luxembourg and Liechtenstein.
The extravagant government spending that most of Europe is now undertaking to cope with the coronavirus crisis is, among other things, the result of their bitter experience with the austerity policies that many adopted during the Great Recession of 2008-2009. Now they believe that big government spending is the key to exiting the new crisis. Even Germany, which traditionally takes a tough fiscal line, has opened up its wallet.
Big spending doesn’t have to mean indiscriminate spending. An effective strategy for managing the crisis requires the government to set its priorities straight. Some spending, such as providing unemployment benefits, are critical, but they aren’t enough to revive the economy. So if there are going to be budget cuts in 2021, they’ll be selective and be more than offset by even bigger spending increases where they are needed the most, in particular investment in physical infrastructure and human capital.
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Legislating a budget only for 2020 can give the government more time to set its priorities but it won’t obviate the need to make them. It may even encourage politically motivated and hasty decisions that deepen the hole Israel is in already.
When coronavirus spending is decided in bits and pieces, rather than as part of a comprehensive program, the risk of ineffective programs or throwaway ideas, such as Interior Minister Arye Dery’s food coupons, grows. The treasury has actually prepared a 2021 budget, which has been kept under wraps by order of Finance Minister Yisrael Katz, and it offers that comprehensive program. It is certainly an improvement over the spending by whim that has been the order of the day until now.
As Netanyahu’s universal grant program demonstrated, when the prime minister wants something there is no one – not the Bank of Israel and not the treasury – who can stop him. The Knesset approved it without any opposition. Maybe the threat of Israel’s credit rating being lowered will be more effective.
Even before the grants find their way into the bank accounts of every eligible Israeli, Netanyahu and his chief economic adviser, Prof. Avi Simhon, are already speculating about another grant. Netanyahu spoke about an additional program. The Prime Minister’s Office hasn’t confirmed or denied that a third grant (the current one and the one made before Passover) may be distributed ahead of the High Holidays.
It may never happen, but we now know that if Netanyahu wants to, he can spend billions of shekels irresponsibly and simultaneously threaten the public with budget cuts down the line.