Treasury: Judicial reform will cost NIS 50-100b annual growth loss

Bezalel Smotrich  credit: Marc Israel Sellem, The Jerusalem Post
Bezalel Smotrich credit: Marc Israel Sellem, The Jerusalem Post

The Ministry of Finance Budgets Division has presented Finance Minister Bezalel Smotrich with its first official warning of the reform's economic consequences.

Top officials at the Ministry of Finance held a discussion last night on the economic consequences of the overhaul of Israel’s judicial system. Budgets Division head Yogev Gardos issued the division’s first official warning about the overhaul.

According to the review presented by Gardos, the government’s measures are liable to lead to a downgrade in Israel’s sovereign credit rating that will increase the state’s debt burden by some NIS 7 billion annually and bring about a loss of economic growth of about 5.6%.

"As far as economic growth is concerned, a rating downgrade will be liable to lead to a rise in the government’s expenditure on interest and to higher financing costs for the private sector and slower growth," the Budgets Division opinion states. "The burden of financing the public debt will rise by between NIS 2.3 billion and NIS 6.8 billion."

The opinion puts the loss of economic growth at NIS 50-100 billion annually. "This loss of product will naturally lead to a loss of revenues within about a decade of NIS 15-30 billion, given the current tax burden," it states.

NIS 270 billion loss of product in five years

In the course of the discussion, the chief economist at the Ministry of Finance, Shira Greenberg, presented a position paper on the risks of the government’s plan for the legal system being legislated. "Implementation of the proposed legal reform is liable to lead to a very significant hit to the Israeli economy," Greenberg wrote. In the past few weeks, Greenberg has been the only senior official at the Ministry of Finance to warn publicly and officially of the risks.

Greenberg cites scenarios from the academic literature that lead her to the conclusion that "damage to Israel’s rating in the measures of democracy and governance can be expected to lead to a structural decline in the rate of growth per capita of about 0.8% annually, which means, over a period of five years following the passage of the reform, a cumulative loss of product of NIS 270 billion and a cumulative decline in state revenues of NIS 70 billion, while after a decade the cumulative negative effect on state revenues is estimated at NIS 385 billion over the following five years."

Greenberg also states that "the damage to state revenues is liable to begin to manifest itself as early as the fiscal years immediately after the implementation of the reform, and therefore if the proposed legal reform is implemented in the near future, it can be expected that the revenues forecast for the coming budget will need to be revised.

"It should be made clear that the structural decline in the rate of growth of per capita GDP of 0.8% annually, on the basis of which the estimate in this paper is made, could turn out to be conservative, as it does not take into account the level of higher education in Israel and the structure of the Israeli economy, which to a considerable extent rests on the high-tech sector, which is a mobile sector and largely dependent on foreign investment," Greenberg’s paper states.

Published by Globes, Israel business news - en.globes.co.il - on March 21, 2023.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2023.

Bezalel Smotrich  credit: Marc Israel Sellem, The Jerusalem Post
Bezalel Smotrich credit: Marc Israel Sellem, The Jerusalem Post
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