Election economics in Israel (2)

It is  nearly a month since I raised the hypothesis that a general election campaign could herald an unexpected benefit to Israel’s economy. Simply put, the law of the land will force the government to enact a temporary budget for early 2013. As this must be based on the 2012 budget, opportunities for unnecessary spending will be limited.

A month later, an amazingly long time in Israeli politics, and itis near certain that the country is heading for an election around February 2013. Ostensibly, the issue is that the Prime Minister, Netanyahu, and his Defense Minister, Barak, have fallen out with each other. Maybe. Theirs was always a love of convenience.

It could be argued that Netanyahu wants to pull the country behind him, as he has to reach crucial decisions over Iran. Very Churchill-like, but not very convincing.

The truth is that Netanyahu’s problem has been around for months and his elastoplast of spin is failing to cover up a bigger and bigger wound. The government has a major hole in its finances. The only way to grab control of the debt is to attack the very issues that are sensitive to his coalition partners. To be specific:

  • Barak, a former commander-in-chief, wants to add billions to his defense budget. Meanwhile, the treasury is demanding a cut of up to 4 billion shekels or US$1 billion.
  • The ultra-orthodox parties, known as a large family sector, are fanatical defenders of the high child benefits. Netanyahu has always been seen as their patron. However, now the  treasury is looking to cut around 20% or 2 billion shekels of these handouts
  • Without explaining here the historical irony, the core in the party of Netanyahu’s central committee, comes from the public sector. The treasury is hoping to cut wages and jobs by 4 billion shekels.

If you have not got it, there are two issues. First, Netanyahu probably does not have enough Parliamentary support for a tough budget. Second, rather than make the challenging economic decisions now, Netanyahu is playing politics with the one aspect of his political life where he has achieved outstanding success; finance and commerce. He is doing what he does best – nothing, delaying, putting off the inevitable and thus hoping something will come up that will allow him to get beyond the electoral process, while risking economic failure.

Today’s newspapers show that exports to Europe dropped 21% in July – August 2013 compared to 2012. VAT may have to go up 1% in January 2013, in addition to last month’s increase. Unemployment is on the rise. An editorial in the Jerusalem Post newspaper correctly argues that:

The downside of calling early elections is that  there will be no new fiscal budget prepared for the first months of 2013.  Instead, the 2012 budget will remain in effect without the necessary adjustments  made for population growth and inflation. And none of the pressing economic  issues will be addressed. A proper 2013 budget will probably not be in place  until May or June.

True, but there is also an upside. Similar to the previous elections after the global crisis in 2008, the government in Jerusalem will find it very difficult to spend its way to election victory. Yes, the existing budgetary gaps will remain, but they should not become more exaggerated through additional fiscal negligence. How the experts at the Bank of Israel will respond to this irresponsibility will be interesting to observe.

Explore posts in the same categories: Business, Israel, Jerusalem

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One Comment on “Election economics in Israel (2)”

  1. […] have written recently that Israel’s financial decision makers have some difficult weeks coming up – […]

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