Annexation: Good or bad for Israel's economy?

The settlement of Na'aleh in Samaria on the West Bank / Photo: Ariel Schalit, AP

Two former Finance Ministry directors present opposing views of the economic aspect of imposing Israeli sovereignty in the West Bank.

Annexation will cost us dearly

David Brodet

NIS 50 billion a year from the national budget, or about 12%. That’s a conservative estimate of the cost of the partial annexation as currently planned. This figure, which would require raising taxes and cutting services for the current Israeli citizens, arises from a study I conducted on behalf of the Commanders for Israel's Security organization.

The partial annexation involves the incorporation of only 100,000 Palestinian residents. As the partial annexation becomes a full one, about 2.5 million Palestinians (West Bank residents) will require full civilian services.

Why is the government not dealing with annexation’s fateful economic consequences, particularly given the coronavirus crisis, which has already exacted a heavy budgetary price? It is imperative to conduct an in-depth discussion about such a major historical event, given its socio-economic implications; had such a discussion taken place, the nation’s responses to opinion surveys would have been completely different.

That is the reason why the government has refused to hear the public's response. An administration that understands the implications of annexation, avoids them. That way, we won’t be able to tell them, "The writing was on the wall." This irresponsible and reckless behavior will lead to generations of heartbreak.

It is convenient for the government to avoid an in-depth discussion, and approve the annexation, relying on the Palestinians to despair of their situation and of any prospect of a political solution, and to settle for the services provided by Israel instead of a ramshackle Palestinian state.

The government also relies on those bedazzled by the vision of a "Complete Israel" who covet the entire territory sans residents, but are willing to offer the Palestinians permanent resident status without voting rights, similar to the status of East Jerusalem residents.

But the price is extremely high for the Israeli economy, and not just during the Covid-19 period. Partial annexation means one state for two peoples. This will not guarantee peace, and the struggle between the peoples will deteriorate into civil war, and international pressure will lead to sanctions, if the Palestinians are not given full civil-political equality (as was done in South Africa).

A fundamental change in the character of the state

Without entering into a debate about demographics, and the meaning of a "Jewish-democratic state," annexation will place us at the bottom of the list of developed countries. This will be due to the huge expense of providing services to all residents of the bi-national state: social security, compulsory education, health and all other services provided to residents.

Today, these services are estimated conservatively at over 12% of the state budget. In other words, more than NIS 50 billion a year. This cost will bring about tax hikes and reduced services for current Israeli citizens. The cuts will hurt the general population, especially weaker groups.

Moreover, the burden on the economy will likely to lead to a lowering of Israel's credit rating, removing it from the roster of developed countries. This move will not happen overnight and could take several years, but the path is clearly headed in one direction: a fundamental change in the character of the state and the nature of the Israeli economy.

Partial annexation will create a new dynamic: Israel will lose its Jewish and socio-economic character. This will lead to a fundamental change in its economic position, and Israel’s economy will lose the status it currently has today.

Israeli society will change. Even now, Israel’s civilian services are below the OECD average. Adding residents from lower deciles will exacerbate the problem, increase inequality, polarize society, and widen the secular-religious divide.

The "partial annexation" will lead to a full annexation of 2.5 million Palestinians (West Bank residents), whose product per capita is less than $5,000. Annexation will lower the average GDP of the unified country to $25,000 per capita. And after the coronavirus passes, the situation will be even worse.

Were its consequences to be examined as befits such a major historic event, the correct questions put before Israel’s citizens would be: "Are you willing to pay the economic, personal-familial, and societal price associated with annexation over time? Will you agree to a change in the socio-economic nature of the state and an increase in taxes, to fund public services for disadvantaged residents, and receive reduced and lower-quality services?" The answer would be a resounding collective, "No".

Sovereignty is the right move, political and financially

Shmuel Slavin

Before presenting my economic analysis, a comment: For this discussion to be truthful, anyone expressing an opinion and/or economic analysis must state their position in advance - whether they are for or against Israeli sovereignty over the West Bank - so that the data can be assessed on the basis of the writer's political position.

I am in favor of applying Israeli sovereignty to Judea and Samaria. This is a national-political act. In the past, economic considerations did not play a part in Israel’s major decisions. For example, in the contentious Oslo Accords, the political leadership, Yitzhak Rabin, Shimon Peres, Yossi Beilin and his band made the decision to reach an agreement with the PLO. The Israel Defense Force was not party to the decision, nor was the economic price questioned.

The decision-makers were guided by a political-messianic vision. And the price, paid in security challenges, economic losses, and human casualties, can only be quantified today.

Another example is the "disengagement" - the expulsion of Gush Katif settlers from the Gaza Strip. Arik Sharon, for his own reasons, made the national-political decision to disengage, regardless of economic-security considerations. It’s doubtful whether the subsequent military operations, and endangerment of southern region residents, were seriously considered.

Ehud Barak made a national-political decision when he withdrew from the security zone in southern Lebanon, despite opposition from the IDF leadership.

The left-wing fear-mongers have often failed in predicting future threats, from the transfer of the US Embassy to Jerusalem that was supposed to ignite the entire Middle East - which did not happen - to Ehud Barak’s doomsday prophecies of a diplomatic tidal wave if there was no progress in the peace process. Instead, the opposite occurred: our international relations have strengthened and diplomacy has flourished.

Although I don’t know what the political-security price will be, I’m willing to take the risk.

The financial analysis

Economists know that in their work, conclusions stem from basic assumptions. The question is, once Israeli law is applied in Judea and Samaria, how many Arab residents will be included? There is no situation or scenario in which Israeli law will apply to all Arab residents of Judea and Samaria. Therefore, the figures of tens of billions of shekels in costs are false. There is no intention to annex all two million residents of Judea and Samaria.

The assumption is that Israel law will apply to about 60,000 Palestinian residents of the annexed territories, and properly, they should be granted rights of Israeli residents. My calculations about the cost of applying the law relate to his group.

I will not address security costs, because no one knows what these really are. We don’t know if it will cost more or less, or if we will avoid wars, should it be determined that the Jordan Valley is part of Israel.

Here are the findings of an in-depth study conducted together with global strategist Dr. Amazia Samkai, analyzing hundreds of data points to examine the impact on several planes in the area of civilian services and the welfare payments that will be due to Arab residents who will be treated as Israeli citizens.

The health system: We calculated the Ministry of Health budget transferred to the Israeli health funds. The per capita health fund budget is about NIS 5,200. As the population joining Israel (out of 60,000 people) is relatively young, and factoring in additional assumptions, the annual cost is about NIS 240 million.

The educational system: Our calculations were based on a range of data sources about the customary educational stipends in Israel for pre-primary, elementary, secondary, and special education, for a total of NIS 400 million.

In addition, we examined guaranteed income support and unemployment benefits. The total civilian expenditures forecast for annexing 60,000 people is approximately NIS 560 million, annually.

State revenue from income tax and VAT: Income from VAT is affected by family size. Although most of the population in Judea and Samaria is poor and its expenditure is low, the state will receive revenue from disposable income. Assuming an average wage of 20% of per capita product in Israel, GDP will increase. More workers will be added to the labor market.

Workers are added to an economy from several sources: natural population growth; diligent and willing new immigrants with previously acquired vocational education, and the like.

Should Israeli law be applied to the Jordan Valley, additional manpower would enter the economy with means of production, such as land and associated assets. The additional taxes to the state treasury would be almost NIS 500-550 million, offsetting the civilian services costs.

Therefore, taking into consideration the national-political, historical, and security-stability factors, the gap between potential expenditure and potential income is minimal.

And finally, most of those who oppose this law are leftists who hold green, open spaces in the highest regard. Should Israeli law be applied to the Jordan Valley and beyond, would Israel do any worse in protecting its green areas and wildlife?

Published by Globes, Israel business news - en.globes.co.il - on July 9, 2020

© Copyright of Globes Publisher Itonut (1983) Ltd. 2020

The settlement of Na'aleh in Samaria on the West Bank / Photo: Ariel Schalit, AP
The settlement of Na'aleh in Samaria on the West Bank / Photo: Ariel Schalit, AP
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