In normal times, close to the approval of the state budget, the Budgets Division in the Ministry of Finance starts putting together the budget for the next year: initial forecasts in order to understand the budget framework and the adjustments required; formulation of economic policy and discussions on the main plans for raising the standard of living, improving productivity, and accelerating infrastructure development; and employment targets.
This year is fundamentally different. First of all, there is considerable uncertainty about the duration and intensity of the fighting in the north and south and how well the economy will perform in terms of growth, employment, and business activity. Secondly, more than a year has gone by since the current government was elected, and it’s still hard to point to a definite economic direction other than survival. This was true even before the war, and is even more true now. Thirdly, the political instability raises fears over the ability to complete an orderly budget process for 2025.
The 2024 revised budget provides a short promo of what can be expected later. Just a month ago, the minister of finance presented a projected deficit of 5.9% of GDP for the coming year (before budget adjustments). Two weeks later, without anything significant having happened in the meanwhile, the forecast jumped, and the budget was approved by the government with a projected deficit of 7.5% before adjustments and 6.6% after. Even before the budget is submitted to the Knesset, there is agreement on more additions to the defense budget, which entails that deficit target being exceeded. These changes are a translation into numbers of the uncertainty - movements of ten of billions of shekels in the forecast within a few weeks. And still, the current forecasts contain significant risk components that must not be ignored.
The earlier the treatment, the less it hurts
The 2024 budget about to be presented to the Knesset reflects irresponsibility on the part of the politicians, and is built on an optimistic scenario. Despite the efforts of the professionals in the Ministry of Finance to create a sensible budget, this is apparently the most that is possible given the current government: weak, battered, sectoral, and without an economic compass.
The fear that Israel will be dragged down into years of economic stagnation has risen substantially. The growing defense burden, the widening infrastructure gap, damage to the real estate sector, the fear of falling investment, and the slowdown in the technology industry, increase the risk of a multi-year negative scenario in the Israeli economy.
Despite the high level of uncertainty, important economic decisions need to be made, and an active economic policy needs to be pursued. This is the time to understand the constraints, to realize that the defense budget and interest rates will rise significantly, and to stop sticking on temporary plasters to hide the bleeding.
This is the time to realize that civilian spending in Israel can’t fall, certainly not significantly, and that there is no escaping tax hikes.
The public will have to pay in its standard of living for the war and its consequences, and also for the economic damage that the government caused before the war. The earlier we treat the problem, the less it will hurt.
It must be admitted and stated loudly and clearly that there isn’t "enough money for everyone." Priorities must change, unnecessary expenditure, chiefly sectoral expenditure, must be cut, and painful measures must be implemented such as cutting welfare payments and deferring unnecessary projects.
All this must come in parallel with measures to boost growth, chiefly advancing infrastructure projects, encouraging investment, raising productivity, bringing sections of the population into the workforce, and focused attention to te real estate market. Without these things, there will be no economic growth, and without growth the risk of another lost decade in the Israeli economy rises substantially.
Political weakness a recipe for disaster
The main problem is that the current minister of finance and government don’t get it. Unfortunately, they’re a long way from that. Even measures such as halting tax cuts aren’t being carried out. Every significant step keeps being deferred (raising VAT, an alternative to fuel excise for electric cars, and so on).
The verb to wait has become an alternative to strategy, apparently out of weakness, and is the opposite of the policy that is required. The obsession with the mistaken coalition party budgets, with all their flaws, has diverted us from the main discussion: the way the government runs away from bad news.
The political weakness is also a sure recipe for failure to make hard decisions, and the result is a policy of waiting and hoping. In short, we are back to the economics of "with God’s help." Even in the Jewish sources we are admonished not to expect salvation from above without work from below.
Israel’s credit rating, as reflected in prices of government bonds, has already fallen in practice. The attractiveness of the economy for investment is being ruined daily, and without an active economic policy these trends will only worsen. We must not get into a situation in which the risk to Israel’s economy keeps rising. Even today the challenge of financing the fiscal data is growing.
We need to learn from the past. In 2003, the crisis was not acknowledged until yields on government debt were close to 12%.
The writer is a professor of economics and public policy at the Hebrew University's Federmann School of Public Policy, and a former commissioner of budgets at the Ministry of Finance.
Published by Globes, Israel business news - en.globes.co.il - on February 6, 2024.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2024.