Treasury Drafts Plans to Fight Economic Crisis

The Finance Ministry is examining additional steps to address the economic crisis, including expanding government insurance for exporters, improving unemployment benefits, reducing the number of foreign workers, ending various tax breaks, and even creating jobs in peripheral areas with high unemployment rates.

Treasury officials hope to present the plan to the new government, once it is established. The goal is to minimize damage from the recession, and create a basis for renewing economic growth once the crisis ends. They seek to do so without committing the treasury to large increases in government spending, as this year's budget deficit is already expected to reach at least 6% of GDP.

The Finance Ministry plan is based on boosting demand in three categories: investments, exports and consumption. The ministry believes it is almost impossible to create investment, as pessimistic economic forecasts are keeping the private sector from investing. But officials believe there is still hope for exports. Since Israel is such a small country in terms of world trade, the officials feel it is possible to keep Israeli exports at reasonable levels despite the global trend.

To encourage exports, the ministry wants to significantly increase its guarantees and insurance for exporters. It is even considering returning to the export insurance market, which was privatized a few years ago.

To keep consumption up, a steady supply of credit is needed, says the treasury. One way to achieve this is to increase households' disposable income and to reduce future uncertainty.

In addition, the treasury, Bank of Israel and National Insurance Institute are examining unemployment benefits. Some economists say expanding benefits may make the job market less flexible and reduce the motivation of the unemployed to take new, low-paying jobs.

However, no decision has been made on this matter. More money for professional retraining is also under discussion.

Another idea being considered is increasing tax cuts. While the treasury has not ruled this out, it wants to pay for these cuts by canceling other tax breaks, such as tax benefits for training fund contributions (kranot hishtalmut).

Also on the table is reducing the number of foreign workers by making the terms for hiring permits more stringent. Their jobs would be filled by Israelis.

Other, less central parts of the plan include "make work" jobs - something Israel has not done for many years. The new jobs would only be in areas far from the center of the country with high unemployment rates and limited opportunities, and could include things like archaeological excavations.

The treasury also wants to strengthen labor law enforcement and reach an agreement with the Histadrut labor federation on a program to finance temporary leaves in place of firings.

The treasury's economic forecasts are becoming more and more pessimistic. The Finance Ministry's latest estimates show the 2009 budget deficit will equal at least 6% of GDP due to the steep drop in tax collection - and that is before any additional spending the new coalition demands.

Previous deficit estimates were in the 4% to 5% range.

Tax revenues are forcasted to be NIS 33 billion less than originally expected when the 2009 budget was drafted; the budget was planned based on forecasted revenues of NIS 203 billion. Including the initial NIS 7 billion deficit, the total budget deficit will now reach at least NIS 40 billion.

This leaves the new government with almost no flexibility to increase spending to address the recession this year. It is likely to be in the same situation next year, too.

Finance Ministry director general Yarom Ariav told TheMarker: "The entire story of the economic crisis is how many debts you will pass on to future generations, and how much those debts will help the economy.," he said.

"It is clear that our ability to drive the economy [forward] by increasing spending is limited, since the economic recovery is primarily dependent on the state of the U.S. economy, and therefore we need to be very cautious in increasing Israel's debt," said Ariav.

"This is a huge crisis, and we do not know how long it it will last. Therefore it is important to avoid mistakes: We are not allowed to waste all our budgetary ammunition immediately. We must not be left without a budgetary response if the crisis continues into 2010," said Ariav.