True to the message that there has been a "little damage to the wing" Ministry of Finance officials continue to broadcast calm regarding the economic and budgetary consequences of Operation Protective Edge. Minister of Finance Yair Lapid declared last week that the war would not "award a prize to Hamas" and Ministry of Finance director general Yael Andorn said the impact of the fighting on the economy was still limited.
But on the margins of the news we now begin to see estimates of the cost of the war that is not a war of about NIS 6 billion including costs to the military and the business sector. This amount is the lower limit of the real costs, which continue to rise as the fighting goes on. For the Israeli economy there is no tactical preparedness during the fighting. For activities to recover extended quiet is required along the Gaza border, reservists must return to their jobs and business and companies must get back to routine. At present it is unclear when such calm will be achieved but it is clear that the day after will pose a double task for the government and Minister of Finance in particular. The first is to cope with the budgetary consequences of the protracted military operation, and the second is to find ways of preventing the economy from slipping into recession.
Of these two tasks the second is the more important. The economy went into the current operation in a weak situation with a fall in exports, industrial production and consumption. In addition, following the 0% saga on new homes, the housing market is stuck in a period of uncertainty and a freeze in construction. With all this in mind it is easy to estimate that growth in the second half of 2014 will particularly low. Thus the Ministry of Finance must mobilize to ensure that the economy does not slip into a continued recession. This requires assistance to the sectors in distress and forming clear policies on areas of development.
Regarding the budget, not only the overall cost is important but also the type of additional expenditures. A one-time civilian expenditure for compensation for loss of income, damage to buildings and compensation to farmers and businesses will weight on the Ministry of Finance and force it to record a larger than expected budget deficit. If we take into account the fall in expected income from taxes in the coming months, then the deficit could approach 3.5%, and in a particularly negative scenario even higher than 4% of GDP. All this is just a preface to the "real thing" - the state budget for 2015 which will now need to be very different than planned by the Ministry of Finance. The Ministry of Defense will require very large budget supplements both because of the war and future preparedness. The amount of NIS 5 billion has already been thrown out. At the same time the fall in expected tax collection will continue, at least in the second half of the year. If the Ministry of Finance wants to return to a deficit of less than 3% of GDP then NIS 1 billion will have to be found. So even if Lapid endangers his political future and cancels the 0% VAT plan for first time homebuyers, he will still need to fill a NIS 3 billion budgetary hole. All this is above and beyond the billions that will be needed to cut for the Ministry of Finance's original budget plan.
The way to meet this task from the Ministry of Finance's standpoint includes three possible components: further cuts in civilian expenditure; raising existing taxes; and cancelling tax exemptions for various sectors - companies and individuals. The Minister of Finance has vetoed raising taxes at least as of today. Cutting civilian expenditure would be a major blow to most Israeli households, and it is doubtful if Knesset Members will agree to commit political suicide to obtain this goal.
This leaves us with cancelling tax exemptions as the possible solution. Former Ministry of Finance Director General Avi Ben-Bassat recommended last week stressing a track that could yield very large sums for the state coffers. The problem is that this would require a battle with huge companies and the large workers committees and this includes contributors to political figures. Ultimately the economy is left with many question marks and in these situations the politicians will try everything to evade making a real decision.
Published by Globes [online], Israel business news - www.globes-online.com - on August 3, 2014
© Copyright of Globes Publisher Itonut (1983) Ltd. 2014