The government decided Sunday not to use the budget reserves to reduce what is expected to be a large deficit in 2019. Instead, it postponed the decision until June, after the election.
The original budget deficit forecast for 2019 was 2.9 percent of the gross domestic product, or 40 billion shekels ($11 billion). That’s already very high. But it is now expected to be even larger, at 50 billion shekels, or 3.6 percent of GDP. That’s already genuinely dangerous.
What makes the economic hole left by Finance Minister Moshe Kahlon and Prime Minister Benjamin Netanyahu even deeper and more frightening is that the deficits are slated to keep growing in the national budgets for 2020 to 2022. And that’s even before a series of expenses are taken into account, including the coalition agreements the next government will sign, higher salaries and pensions for police officers and an increase in the defense budget (of 3 billion to 4 billion shekels a year).
Moreover, it’s anyone’s guess as to what will happen if there’s a recession or a military operation. In other words, Netanyahu and Kahlon have created a serious, long-term structural problem.
Kahlon, as finance minister, failed to maintain a responsible budget. But Netanyahu is no less to blame, since he approved all of Kahlon’s spendthrift moves.
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While Netanyahu is keeping silent about economic issues and trying to place all the blame on Kahlon, Kahlon is trying to defend his policy. He says at every opportunity that he gave additional benefits to the disadvantaged. But he also granted additional benefits and tax breaks to the economy’s strongest players.
He gave enormous raises to the bloated public sector and government monopolies and distributed huge sums to retired service members, most of whom already received very respectable pensions. He also gave additional money to the workers and retirees of Israel Electric Corp., already Israel’s wealthiest employees, as part of a company “reform.” All this caused dangerously large deficits.
Kahlon and Netanyahu also failed to carry out important reforms that would have generated growth, which is gradually declining as a result. It was 4 percent in 2016, fell to 3.5 percent in 2017 and fell again, to 3.2 percent, in 2018. Consequently, the standard of living is falling in comparison to Europe and the United States.
At Sunday’s cabinet meeting, a Bank of Israel official said that due to the excessive deficit, there’s a risk that Israel’s debt-to-GDP ratio might rise. He advised whatever new government is formed after April’s election to take steps to reduce the deficit.
But the current government shouldn’t wait for its successor. It must immediately take all steps necessary to reduce the deficit and restore Israel to the path of a declining debt-to-GDP ratio. Netanyahu and Kahlon must fix what they have broken.