During his press conference yesterday Prime Minister Benjamin Netanyahu threw out an apparently spontaneous question to his economic adviser. "Tell me, Avi, how much do we pay today on ten-year debt?" Netanyahu asked Prof. Avi Simhon, chairman of the National Economic Council. "0.6%," Simhon replied. A few hours earlier, at a stormy meeting at which the plan for distributing checks to Israeli citizens was presented to senior Ministry of Finance officials, budgets commissioner Shaul Meridor warned that Israel would go the way of Venezuela if it adopted Simhon's plan. Simhon responded that investors and global markets saw Israel in an altogether different light. The low interest rates that Israel pays, Simhon said, prove that the markets see it as a strong, stable economy led by a responsible government.
Simhon is right, but mistaken. He is right that Israel is in a completely different place today from where it was in the past. In 1985 and in 2002, the Israeli government had to introduce painful budget cuts to persuade the markets that it was possible to give it vital credit. We are not there today, and fortunately so, since it is doubtful whether the current leadership has the courage or the ability to make the kind of decisions made by the country's leadership in previous crises.
Israel's high capacity for raising debt enables it to adopt extraordinary measures to extricate itself from a once-in-a-century crisis. Thanks to that capacity, it can expand its fiscal deficit to levels not seen since 1985, without being punished for it. This is the reason that Governor of the Bank of Israel Amir Yaron gave his backing to the additional economic rescue program unveiled last week, and justified raising this year's deficit to 13% of GDP.
This capacity, however, is built on confidence, and confidence is the Israeli economy's most important strategic asset. Confidence grows and is built slowly. It is like credit points that are accumulated over many years as a reward for prudent, responsible, and consistent fiscal conduct. When, in 2018, rating agency S&P upgraded Israel's sovereign rating, it was not done in recognition of the achievements of the finance minister at the time, Moshe Kahlon. It was done on the merits of the achievements of Israeli government policy over the previous 20 years, such as in reducing the ratio of debt to GDP from around 100% in 2002 to around 60% in 2020.
But confidence is quickly destroyed. A perception that there has been a change in behavior, that a sense of fiscal responsibility is no longer what drives the conduct of the Israeli government, is enough to demolish the carefully built structure of confidence at a stroke. Twenty years of responsible policy will not help Israel even for a minute if the markets decide that the rules of the game have changed, that the government's conduct has become irresponsible. Even the Bank of Israel's huge foreign currency reserves will not prevent the flight of capital and the collapse of the currency, and in consequence of those things, the collapse of the Israeli economy. If confidence in the State of Israel is destroyed, we will not receive warning. A little like the rate of infection with the coronavirus, it will take time for us to discover the damage that has been done, but then it will be too late to fix it.
For that reason, the use Simhon is making of the confidence asset is the most dangerous aspect of the economic plan that Netanyahu presented yesterday. Simhon argues that his plan is based on similar measures introduced in the US and in other developed countries. He says that even the International Monetary Fund is now encouraging governments to distribute money to their citizens. He is right, in that distributing money to the people is not in itself an irresponsible step when it is done in the context of a once-in-a-century recession.
But what is disturbing in Simhon's plan is the following reasoning: we wanted to distribute money to those who deserve it, Simhon said, but it's impossible. Simhon argues that the Israeli administration's systems have no way of identifying who needs money and ensuring that it gets to them in reasonable time. This line of argument indicates a basic lack of management capability in the government. It is an admission by the government that it is spraying billions in every direction because it has no alternative. That counts as irresponsible behavior.
Published by Globes, Israel business news - en.globes.co.il - on July 16, 2020
© Copyright of Globes Publisher Itonut (1983) Ltd. 2020