Judging Israel’s economy – mitigating circumstances?

The Israeli electorate will go to the polls on January 22nd 2013. This is about ten months earlier than required by law, but compared to predecessors over the past decade, the outgoing government has lasted a long time.

Historically, the main debates between the parties have centred on geopolitics; defense, Palestinians, relations with America, etc. However, there have been increased tendencies in recent campaigns to stress social and economic factors. Given the impact of new social movements over the past two summers, that impetus is likely to remain.

So how do you judge the performance of the outgoing government with an all-time record of 30 ministers? What have they achieved on the economy?

An interesting position was taken by Dr Yuval Steinitz, the Finance Minister, who has proclaimed that the politics of the next few months will not encroach on past gains. After all, a series of  stabilising measures were enacted just recently in July. And the Bank of Israel, led by the renowned and venerable Professor Stanley Fischer, encouragingly believes that:

Notwithstanding the recent slowdown, there are a number of indicators showing that there is a high level of activity in the economy, which may help the Israeli economy should a crisis erupt in Europe.  The output gap that is estimated through various methods has been hovering for a long time around low values.  The unemployment rate has been at 7 percent since the fourth quarter of 2011—a low level in historical terms. This low unemployment rate exists despite the fact that the participation rate in the labor market is at an all-time high of 63.6 percent.  In parallel, there is an upward trend of 2 percent in real salaries since the beginning of 2010 (they are still 2 percent away from the all-time high levels prior to the crisis), and there is a high rate of available positions.

Journalists are taking a somewhat more critical (naturally, sic) viewpoint, looking at past political promises and comparing them to deliverables. A typical example can be found from “Ha’aretz“, which essentially gave ministers a ‘thumbs down’. The newspaper’s conclusion is that aside from growth, Netanyahu’s government has failed on the economy.

I am not sure. Let us start at the beginning, as they say in the Holy Land. Israel faces a strain on its budget that few other countries have to deal with – a persistent and real threat to its survival. Defence expenditure is about 6-7% of the whole budget, absurdly large compared to most of its fellow OECD members and yet low compared to its hostile neighbours. And then if one adds on to that burden the global downturn that has dogged the government during its tenure, it becomes clear that Israel has faced a “double whammy” for much of the past four years.

To give credit to the mandarins in Jerusalem, the economy has moved forward.  Growth in 2008 and 2009 was 4% and 0.8%. The IMF assessed global progress at 3% and then down 0.6% for the same period. Going forward, Israel has achieved 4.8%, and 4.7%, with 3.2% growth expected in 2012. Global stats are 5.1%, 3.8% and 3.3%. Israel has performed well.

I could complain that the government has failed to deliver reform in two highly protected and sensitive areas; releasing public land for housing development and the distribution of fruit and vegetables. The former ensures that housing remains near unaffordable for young first-time buyers and is creating a dangerous market bubble. The latter allows farmers and wholesalers to maintain high prices to the public, while overseas competition is kept out of the market.

Not good. But that is not my major concern. Benjamin Netanyahu’s government has kept a balanced set of accounts for most of its period in power. Yet, it is going to the polls with a 14 billion nis (US$3.5 billion) gap in the budget. At the moment, there are only tenuous thoughts on how to cover the difference, and many of these are clouded by political party conflicts.

Simply put, this is irresponsible! This shows a lack of leadership. It endangers the potential benefits to be gained in 2015, as gas revenues should come into play. And it clouds the seriousness, even legitimacy, of any electoral message that may be thrown to the public over the next few weeks.

How will voters view this deficit? Will they be put off or will they be more concerned about negotiations with the Palestinians and how to handle Tehran? By January 23rd 2013 the world will know. Yet however many millions turn out to cast their ballot, the sign for 14 billion shekels cannot be hidden for ever. Time for somebody to take responsibility.

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