Israel’s “non-election” economics

On Monday night of May 7th, Israelis went to bed believing that they would be voting in a general election by early September. By the following morning, after the Prime Minister had struck a deal with an opposition party, the “blah blah” show had been postponed for until late 2013.

What had happened and how to explain Israel’s coalition politics to an outsider would take more than a simple blog to describe. The effect on talks with the Palestinians, handling Iran, trying to get the trains to run and maybe even on time, those are all issues that I will leave to others to evaluate.

I just want to examine the local economy for a few moments, a matter which Bibi Netanyahu is proud of and is prone to recall his days as Finance Minister. To cut to the chase, Israel boasts an excellent record over the past decade. Even in 2012, growth will end up close to 3%, very praiseworthy compared to many of its international trading partners.

However, there are many problems on the horizon, and now is definitely not the time to play election-economics. For example: –

The indications are that the budget deficit for 2012 is going to end double what had been budgeted, mainly due to lower tax revenues. So there will be little extra money for popular voters issues, which the Prime Minister will seek to distribute.

Now one way to finance a deficit is to encourage people to buy government bonds, and that often requires a higher than normal rate of interest. However, the Bank of Israel is looking in the other direction. And just to ensure that the matter is even more complicated, if interest rates were to be jacked up, then the shekel will rise in value (even more). That in turn will jeopardise the profitability levels of Israel’s exports.

Anything else? Well unemployment that had struck an all-time low of 5.2% a year ago is now forecast to leap to 6.7%. There is growing concern about the increasing gap between the haves and have -nots. And the government is refusing to challenge interest groups; farmers, who prevent competitive imports, or unions at the ports, who keep import duties high, or the Electricity Corporation, which allows pays the bills of its employees.

And where is the government in all of this looming economic concern? Well, so long as the power brokers in Jerusalem strike another deal to put off elections and keep shtum, I guess that nothing too catastrophic will happen to the folks at the top.

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