If you’re not getting nervous about Israel’s political paralysis, you should be. Until now there was a near wall-to-wall consensus in the financial world that, despite the indecisive results of two back-to-back elections, at the end of the day a coalition would emerge and that it would be a national unity government, the best of all possible options.
Now, it seems that the first cracks in that wall have opened up. Moody’s, one of the big three credit rating services, this week affirmed its glowing assessment of the Israeli economy, fiscal policy and even its high standards of governance. Our A-1 credit rating in intact and Moody’s outlook remains positive. But amid all the praise for Israel’s “very strong” credit profile, the economy’s “resilience” and the country’s “strong institutional framework,” the men from Moody’s are starting to sweat.
The report doesn’t mention the term “third election in one year” outright. It still predicts a government will emerge from the current round of coalition talks. But it does issue this warning: “Failure to form a new government, or the formation of a disparate coalition unable to command the internal consensus needed to advance new fiscal measures, would present a risk to Israel's credit profile.”
What that means in layman’s terms is that Israel doesn’t have a lot of time left to get a handle on its growing budget deficit.
The deficit? Is that the only thing we have to worry about? What about Iran? What about democratic values? Religion and state? The “deal of the century”?
Of course, being a credit rating agency Moody’s is focused on money matters. But in this case it’s not necessarily wrong to do so. More than any of the other issues Israel faces, it’s the one that’s bearing down on us quickly and at an inopportune moment. Israel’s strong fiscal position -- its relatively low budget deficits and debt relative to GDP -- have been the economy’s firmest anchor over the last two decades. So firm, that politicians and interest groups take it for granted.
Finance Minister Moshe Kahlon was among those that assumed the money was there waiting to be spent and pursued a policy of tax cuts and spending increases, seemingly confident that there would always be tax revenues to pay for it all.
As it turns out, tax revenues don’t grow on trees and the government is now running its biggest deficit in years. Debt to GDP is on an upward trajectory.
This is not a great situation to be in if the economy slows down, or slides into a recession. There are distressing signs not that Israel itself is headed for a slowdown, but that the world is. It is during recession that deficit spending is needed, to counterbalance the slumping private sector.
It would be chutzpah to predict the timing for all this -- or even to say with complete confidence that it will happen. But if it does, the problem could begin emerging within months. Israel doesn’t have a lot of time for more elections and coalition bargaining.
If Netanyahu and/or Gantz can’t form a government either together or separately, that’s an obvious problem because it spells yet another election and more political paralysis as the deficit keeps growing.
But Moody’s correctly warns that even if they do agree on some form of national unity, we can’t all breathe a sigh of relief.
The term “national unity government” naturally conjures up images of consensus as ministers roll up their sleeves and get to work in a spirit of amity. The two big parties, Likud and Kahol Lavan, have more in common politically than their campaign propaganda suggests and they’ll be free of small-party blackmail, so why can’t they all be friends?
Here’s why: Likud and Kahol Lavan are both going to be looking to the next election and how they can break the stalemate that forced them into each other’s arms and let one form a government without the other. National unity could quite easily devolve into a populist competition over who can hand out the most goodies to key constituencies while defying and embarrassing the other.
Some say Israel’s fiscal situation is good enough to wait to fix matters. Let the politicians play. But that misses the big point that the stalemate that has developed may not be a one-off event; it could well be the future of Israeli politics, much like it has become the norm in European politics.
A pity it would be if the next generation’s history books end up recounting how over 30-plus years the Israeli economy succeeded in overcoming external traumas of all kinds – mass immigration from the former Soviet Union, the Second Intifada, the dot.com bubble, the Second Lebanon War, the Great Recession, missile wars with Hamas and the post-Arab Spring chaos – only to be undone by political paralysis at home. But a straight line analysis of two elections, and maybe a third to come, points exactly in that direction.
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