Four elections inside of two years, and perhaps a fifth one on the way, provides ample evidence that Israeli politics operates on the assumption that it has all the time in the world. But it also shows how disconnected it is from the lives of average Israelis and from the massive challenges the country faces. The political establishment is self-involved.
If another caretaker government emerges from the election, it will be bad news for Israeli society and the economy. It would be better if a stable government of any kind is formed that can deal quickly with the urgent challenges the coronavirus crisis has created. These are the main ones.
The labor market
No matter what kind of government is formed, the most urgent agenda item it will face is unemployment. The rate last month, when the economy was just beginning to reopen after the third lockdown, was 16.9 percent by its broadest measure, equal to some 700,000 people out of work.
Reopening the economy is the most important tool it has for lowering the rate in the wake of the pandemic. The jobless rate will almost certainly fall sharply in the next several weeks as economic activity moves closer to normalcy. Thus, by the time the next government is sworn in, we will have a sense of the “hard” unemployment rate, i.e., how many jobs were actually lost during the coronavirus.
The goal shouldn’t be to create temporary, casual, unrewarding employment but to develop ways to create sustainable jobs. That can be done by encouraging the formation of new small businesses and the expansion of existing ones, by moving forward with infrastructure projects that will increase productivity and upgrade Israel’s digital networks.
The post-COVID labor market, with its growing use of remote work and schooling, has the potential to destroy jobs as much as it creates them. Therefore, the next government must develop a roadmap of where the labor market is heading and provide direction through retraining ad incentives.
There isn’t going to be a one-size-fits-all solution, Different segments of the population, different sectors of the economy and different age groups will have to be addressed according to their special needs. Now that the biggest health and economic crisis Israel has ever faced is behind us, we need to set aside broad, heavy-handed solutions and focus on real needs.
The civil service
Budget deliberations have traditionally focused on numbers and almost never with processes. A perfect example of that is the education system: Spending doubled over the last decade, but standardized test scores for students showed barely any improvement. Money is without a doubt a critical factor in improving school performance, but it isn’t the only one.
The civil service shines in a few areas, such as the state-funded health maintenance organizations. We saw how in the worst days of the coronavirus crisis the system was capable of caring for all the sick, established special COVID units quickly and, of course, managed a giant vaccination program with flying colors.
But a lot of the civil service is inefficient and ineffective, first and foremost the education system. It couldn’t cope with the pandemic and the schools were in a state of constant crisis during the year, far more so than its peers in other countries.
- The economy is reopening, but many Israelis on unpaid leave refuse to return to their old jobs
- Tax rate for Israel’s poorest likely rose during the COVID pandemic
- Jobless rate fell only moderately as the economy reopened in February
The coronavirus year has proven the importance of having an efficient public sector and the need to invest in it and cement its successes where they exist. The adoption by civil servants during the coronavirus year of more flexibility at work provides an excellent opportunity to lock those changes into place and use them as the new standard.
That is a mission that the next prime minister and finance minister will need to take on. The days of talking but not acting on reform are over. There may even be someone on the union side to talk reasonably about it in the person of Arnon Bar-David, chairman of the Histadrut labor federation.
The tax regime
Some of the parties competing in the last election talked about lowering tax rates. If we were to gather all the promises together and put them into effect, the government would be paying us taxes, rather than the other way around. Forget the promises: The reality is that the next government won’t be raising taxes so quickly and if it does lower any, it will be by raising them elsewhere.
Nevertheless, the next government faces three major challenges on the tax front – funding the 210 billion shekels ($63.5 billion) that’s been budgeted for addressing the coronavirus crisis; addressing the differing economic toll of COVID on different parts of the population; and reforms that will do things such as incentivize new businesses and deter companies from harming the environment.
That means the next government will have to seriously examine the system’s many tax exemptions, which cost the state some 75 billion shekels annually, and to identify growth engines for the economy and focus incentives on them. To do that means steps such as eliminating exemptions that don’t work (such as the one from value-added tax on fresh produce, which has created a huge black market in the business) and ensuring that big corporations really pay taxes rather than enjoy tax benefits. If there are going to be tax breaks, let them go to small businesses, which felt the brunt of the coronavirus crisis.
It’s been almost two decades since the government undertook a major overhaul of the tax system. Today is a good time to examine what works well and what doesn’t. Reforms could contribute to the economy’s post-COVID recovery and into the next two decades.
The make-up of the next government, much less who will be holding the key positions, isn’t clear. But the challenges it faces are self-evident. Even if there are ideological differences between the coalition partners, there are enough points of agreement that it should be able to tackle a large number of areas quickly.
However, all this will only be possible if the next government has a four-year horizon line. These are not instant, “heat and serve” challenges, but critical ones as much for the long as for the short term and will entail doing battle with interest groups.
When the Israeli economy was growing and the jobless rate was low, it was possible to kick the can down the road. But that’s no longer possible. After two years of nothing but politics, the politicians need to finally put politics to the side.