Opposition to the government's judicial overhaul has reached boiling point in the Ministry of Finance. Last night, Minister of Finance Bezalel Smotrich sat with his top officials who warned him of the dangers and economic consequences of the legislation being pushed through by the government.
Until yesterday, Ministry of Finance officials had discussed the reform only in internal forums, without the presence of Smotrich. In recent weeks, some senior officials requested a meeting with Smotrich, and were asked by Director General Shlomi Heisler to prepare an opinion and forecasts that could be submitted to the minister. After these were received in the last few days, a meeting was arranged which Smotrich attended last night straight from Ben Gurion airport after returning from abroad.
The hardest hitting views that came up in the discussions were those expressed by Budgets Division head Yogev Gardos, chief economist Shira Greenberg, and Ministry of Finance legal adviser Asi Messing. Gardos estimated that the legislative measures could lead to a cut in Israel's credit rating, and reduction in GDP of about NIS 50-100 billion a year, in the long term. Greenberg provided more comprehensive estimates, which included damage to the economy beyond the credit rating downgrade itself, and that could reach, according to "Globes" calculation, damage of the magnitude of NIS 300 billion to GDP, with full implementation of the legal overhaul.
Messing presented the significance of the legislation for property rights and contractual rights, and the effect it might have on the economy in terms of investor uncertainty. Messing depicted a troubling picture in which the weakening of state institutions would make Israel much less attractive in the eyes of the world.
A press release issued by the Ministry of Finance after the meeting said, "In the discussion Israel's macro data were presented as were the possible risks and opportunities of the reform and the protest against it."
In actual fact, the officials presented only risks - while "opportunities" were mainly presented by Smotrich himself.
Additional risks were presented by Accountant General Yali Rothenberg, who focused on an analysis of the capital market, stocks, foreign exchange and government bonds. Director of the Israel Tax Authority Eran Yaakov also spoke of a potential fall in state revenues.
After listening to the forecasts of his senior officials, Smotrich implied that he was not moved by the horror scenarios, and that he felt sure that the risks could be hedged.
According to Smotrich, the opinions presented to him showed exposure to serious economic risks only in the medium-long term, while in the immediate term the figures were far from dramatic. Rothenberg and Gardos admitted that it was difficult to predict with certainty volatility as a direct result of the legislation, while Greenberg believes that it is indeed a clear consequence of the government's measures.
Not only the economy: the stormy discussion spilled over to democracy
Discussions also touched on whether the legislative measures would harm Israeli democracy. Some of those present told Smotrich that in the end it didn't matter whether he himself thought the reform would enhance democracy, if foreign investors and credit rating agencies thought otherwise.
Smotrich presented his solution to the crisis, which includes a significant softening of the reform. Smotrich said that the entire economic risk stemmed from the fact that the world will think that there is damage to democracy, while the government is trying to reach an agreed plan, and has even said that in the current version of the legislation "there will be things that will not be included in the end."
Smotrich expressed complete confidence that he would succeed in convincing the world that this was a successful reform that would not change government in Israel for the worse. He understood that the world might not change its mind about the reform in the next year or two, but said that within three years it would because in his opinion, "The world will see in retrospect that no damage has been done and will go back to believing in Israel." And what will happen until the world begins to see the judicial overhaul in Israel in a positive light? Smotrich believes that the economic damage can be priced and hedged by then.
Smotrich: The reform is good for the Israeli economy
Smotrich posted a long Facebook post in which he referred to the findings of the Ministry of Finance officials. He reiterated his position that "the reform will be very good for the Israeli economy."
Smotrich wrote: "Studies have indeed been presented that show a connection between damage to democratic institutions and weakening of an economy's rating - in terms of interest rates and growth and the state's revenues from taxes. But this is exactly the point. This discussion is based on the incorrect, not to say unfounded, assumption that the reform harms democratic institutions." The bottom line is that Smotrich believes that, ultimately, foreign investors and the credit rating agencies will be convinced of the government's correctness, "A lie does not last long," he said.
Published by Globes, Israel business news - en.globes.co.il - on March 21, 2023.
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