Netanyahu Wants to Spend Big to Rescue Israel's COVID-hit Economy, While Others Aim to Spend Smart

Concerned about the labor market amid as unemployment remains at a high 12%, the Bank of Israel looks askance at the prime minister’s grants program

Nati Toker
Nati Tucker
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Benjamin Netanyahu at a ceremony in Jerusalem, last month.
Benjamin Netanyahu at a ceremony in Jerusalem, last month.Credit: Alex KOLOMIENSKY / POOL / AFP
Nati Toker
Nati Tucker

Israel’s politicians are too busy with election campaigning to be paying much attention to the biggest challenge they face – how to rescue the economy in the wake of the coronavirus crisis and restore growth. Even now, as the economy is reopening from the most severe of the pandemic restrictions, the government should be undertaking a coordinated exit. But no one has been giving it any real thought.

The 15 billion shekel ($4.5 billion) program to “aid the economy” that Prime Minister Benjamin Netanyahu and Finance Minister Yisrael Katz put on the table a month ago is entirely political. In fact, it’s not really a program but a “presentation,” as the Bank of Israel has termed it. It includes a grant to every citizen, increased grants for businesses and more grants for the unemployed.

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At this stage, most of the plan’s elements are frozen because they haven’t gotten the go-ahead from Attorney General Avichai Mendelblit. But that doesn’t mean there’s no need for the government to be acting right now. Officials have been trying to get decision-makers to act on a package of proposals that are completely different from the Netanyahu-Katz plan.

Among them is the Bank of Israel, which is concerned about the labor market. Despite the steps to reopen the economy in the last weeks, the broad unemployment rate remains a high 12%.

Research by the central bank has shown that the coronavirus economic crisis has been different from ordinary economic crises. Economic crises are normally wide-ranging, starting with companies losing money, leading to rising unemployment, declining consumer spending, and cutting into government tax revenues. Surprisingly, the damage to the economy by the current crisis has not been as widespread, hitting only certain sectors which faced restrictions to control the virus.

While consumer spending has fallen sharply, the decline has focused on services subject to COVID restrictions. But incomes have not fallen, and neither has business confidence. Household income actually rose 3% in 2020. The rise in income and drop in spending led to a rise in savings.

The government’s socioeconomic safety net, which has cost 130 billion shekels to date, helped Israel get through the crisis. Israel is not alone in that regard. Other governments spent even more as a percentage of gross domestic product. But as much as the spending worked, there are limits to how much money the government can spend. “The budget deficit can’t be stretched out without limit,” Governor Amir Yaron recently told the cabinet.

What this means is that the government doesn’t need to provide the economy with another safety net – all the programs that run until June are sufficient for the needs of the economy. Now that Israel is exiting the crisis, there is no need to for such broad measures.

The Bank of Israel has already come out publicly against the plan to give a grant to “every citizen” at a cost of 3.5 billion shekels, which it says won’t enable aid to efficiently reach the places it’s needed most badly. It sees no reason to boost household income which, in fact, rose in 2020. Consumer spending fell because of coronavirus restrictions, not because of a lack of money.

The first slide of the Netanyahu/Katz presentation relates to the Biden administration’s $1.9 trillion relief program, which was approved by the Senate over the weekend and which Netanyahu is using to justify his own grants program.

However, he failed to mention that the U.S. aid program had expired and a new one was needed. In Israel, the current relief efforts run until June. In Europe, the Bank of Israel found, the only countries implementing new programs are those where the previous ones had expired. Rather than the 15 billion shekels Netanyahu and Katz are talking about, Bank of Israel officials say what’s needed is a targeted effort costing only a tenth of that.

The main challenge in reopening the economy is to bring down the jobless rate and encourage businesses and workers to resume activity quickly. To do that, government assistance should be targeted only where it’s needed.

Policymakers assume that after the extended unemployment benefits period expires in June, the jobless rate will fall sharply. Nevertheless, the problem of workers who have been out of the job market for an extended period remains. Today, there’s a program to encourage low-paid workers on unpaid leave to go back to their former jobs by covering the difference between their unemployment benefits and the pay they had previously been getting. The Bank of Israel believes that this program is the best way to help the long-term unemployed.

It also believes the government should be helping businesses that need to adjust to the realities of the post-COVID economy through grants and loans. There are models for how to do this in a targeted way that will cost taxpayers relatively little.

The central bank has repeatedly stressed that the government must undertake measures to foster economic growth. Last July, Yaron told the cabinet these include a reduction in regulation, digitization, improved financial services and infrastructure spending. Officially, some 5 billion shekels have been appropriated for these proposals, but the actual amount spent is less because the money is redirected to other purposes.

In the meantime, the Bank of Israel has created a new to-do list, which includes deploying fiber optic cable to homes. The idea is to employ people without high-level skills in a project that will give a big boost to the economy.

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