"I'm obsessive about the economy," Prime Minister Benjamin Netanyahu declared in his interview with Ayala Hasson on Channel 13's "Hamateh Hamercazi" program. "The health coronavirus is mostly behind us, but the economic coronavirus is still here," the prime minister said, and he intends to battle it. According to him, he is the only one who can do so. Naftali Bennett "and anyone else can bring airplanes that drop money from the skies", Netanyahu said, but he himself has an orderly plan for boosting the economy.
To understand what Netanyahu said, we tried to examine in depth the measures for boosting the economy to which he referred and how realistic they are in view of the position of the economy. The question of the timing also arises: declarations about the economy when we are once more in an election period when almost anything goes.
The money will come from economic growth
From what Netanyahu says, his plan consists of three major moves. The first is that he will dole out another NIS 15 billion in grants to households and businesses, among other things as an incentive to switch from unpaid leave back to work. Secondly, Netanyahu announced that he would cut tax rates for small and medium size businesses, freeze VAT for them, and give them tax breaks. The third is the promotion of five "mega-projects" in collaboration with the UAE, which intends to invest NIS 40 billion in Israel.
Apart from the UAE, where will the money come from to fund these policies? From growth. In other words, from higher tax collection as a result of the growth of the economy.
There are two scenarios for the growth that Netanyahu talks about. The Ministry of Finance's main scenario, as reported this month, assumes that the coronavirus pandemic remains under control throughout the rest of the year and that public health restrictions are entirely removed in the second half of the year. In this scenario, the Ministry of Finance sees the economy growing 4.9% in 2021.
In its pessimistic scenario, in which the pandemic is not brought under control and the restrictions remain in place for the whole year, the ministry sees the economy growing by just 2.8%.
There is, however, a footnote to these rosy figures. All the Ministry of Finance's optimistic scenarios are based on the assumption that by June this year all existing government aid measures cease, including unemployment payments to those on unpaid leave and grants to businesses. They do not take into account NIS 15 billion that Netanyahu will distribute to the general public and to businesses, and certainly not tax cuts.
Are grants needed?
This brings us to the need to hand out grants. The criticism of indiscriminate distribution of cash to the public at large is well known from the previous round of "cash for every citizen". It's hard to find economists who will support such a program, and even harder to discern the benefit that it will bring to the economy. This is not money that generates growth, and it is not channeled to those who really need it.
According to Central Bureau of Statistics figures, the coronavirus pandemic led to a rise in the propensity to save to a record level in 2020, reaching nearly one third of disposable income: 31.2%, which compares with 21.3% in 2019. This figure once again prompts the question, why do households need a general grant? The simple answer is that they don't.
The business sector, particularly small and medium businesses, is crying out for further aid to help it recover, and here Netanyahu hits the target - or potential votes - squarely, when he talks about grants and relaxations. But, and it's a big but, the question that needs to be asked is what kind of grants will be given and whether they will help a business to get back on its feet and return to regular activity, or whether in the end it will be more of the same. It's not that the grants previously given to businesses didn’t help them, but rather that what was appropriate to the emergency phase of the pandemic is not necessarily what is appropriate now, a year later.
At any rate, in the interview Netanyahu did not provide details that might shed light on the kind of grants that will be distributed, and so it's hard to comment on this part of the plan in depth.
Tax cuts: What does the prime minister know that the governor of the Bank of Israel doesn't?
Netanyahu speaks in general terms about tax cuts for businesses as well, again providing scant detail. Here, though, we can identify two opposing forces affecting any tax cut proposal. On the one hand, reducing taxation on small and medium size businesses, which are the engine of the economy, is a welcome step, for example through extension of accelerated depreciation, or lower taxes connected to employment.
On the other hand, how will Netanyahu isolate, even from an operational point of view, a tax cut for businesses that have been harmed, and not give the same benefits to large businesses that have not been harmed? And more importantly, where will the money come from to finance these tax cuts?
Not long ago, Governor of the Bank of Israel Amir Yaron said that the government would have to take into account a tax hike in the next budget. Netanyahu apparently thinks otherwise.
Expanding debt: The way to a rating downgrade
The direct consequence of cutting taxes and making payouts to this or that sector is a larger fiscal deficit. As long as there is no budget framework, it's a free for all, and all the expense of the grants can be placed in "coronavirus boxes", the money required to deal with the coronavirus crisis outside of the budget, but the day of reckoning will at some point come for that as well, for someone.
Netanyahu's plan will lead to a substantial rise in Israel's debt:GDP ratio, and is therefore liable to have a deleterious effect on the country's sovereign debt rating, and hence on its ability to raise debt at low interest rates.
Israel's debt:GDP ratio, which had fallen to 60% on the eve of the crisis, rose to an estimated 72.5% in 2020 and is expected to continue rising to 77% in 2021. This is on the assumption that there is no worsening in infection rates. The Ministry of Finance does not expect the ratio to decline from the 78% level before 2025 even in its optimistic scenario. In the pessimistic scenario, the ratio will rise to around 82%. From there, it's a short step to a downgrade of Israel's credit rating.
As long as greater debt is earmarked for spending that generates growth - such as construction of a metro in Tel Aviv, investment is education, and so on - then it can be positive. But as soon as it goes to programs that do not promote growth, such as grants to households, it harms the economy.
At the moment, as mentioned, there is no clear plan and no budget source for each of the measures that Netanyahu has talked about. He too knows that, by law, for every measure that he seeks to implement he will have to provide a source. The budget is a zero-sum game: to give in place, you have to take from somewhere else. And for now, even after his media interviews, it's not really clear where Netanyahu intends to take from in order to give.
Published by Globes, Israel business news - en.globes.co.il - on March 15, 2021
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