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No Place for Economy to Hide From Israel’s Election Nightmare

Thousands attend a rally against the Netanyahu indictment on November 26, 2019 in Tel Aviv, Israel. Israels attorney general has indicted Benjamin Netanyahu for bribery, fraud and breach of trust. On November 26th 2019 (Photo: Bloomberg / Kobi Wolf)

Israel’s incessant election cycle has left Avraham Yustman with a problem.

With the country headed to its third ballot in a year, and lacking a permanent government and budget, about half of his Kemach Foundation’s operations are at risk, including a state-funded program that’s distributed vouchers for professional training to hundreds of Israel’s ultra-Orthodox Jews.

“We have no ability at the moment to plan our budget for next year,” said Yustman, vice president of Kemach.

Political maneuvering for Israeli leaders is increasingly taking priority over long-term planning as a period of electoral paralysis pushes off crucial investments and reforms.

The national debt load went up last year for the first time in nearly a decade while the budget deficit widened, with the government now unable to increase taxes or cut spending. The International Monetary Fund has already warned that could act as a constraint on the government’s “ability to use fiscal policy to cushion shocks to the economy.”

Debt Downer

Two rounds of national elections this year ended in deadlock and right-wing Prime Minister Benjamin Netanyahu, as well as his rival, former military chief Benny Gantz, have both failed to form coalition governments. There’s no budget since a new government is needed before major decisions can be made.

Israeli central bankers are already concerned that operating on a continuance budget for an extended period could have “a contractionary effect.” Finance Ministry Accountant General Rony Hizkiyahu told parliament that the delay would hit markets.

Longer View

Israel’s prospects ride, in part, on whether it succeeds in bringing the ultra-Orthodox, the country’s fastest-growing demographic, into the workforce. Productivity and workforce participation have been dragged down by some segments of the population. And the country needs to upgrade its health and transportation infrastructure.

The economy might cope with the more immediate issues, but the challenge is to make progress on what could hold it back over the long term, according to Anthony De Lannoy, Israel’s executive board representative at the IMF. “You have a couple of structural problems in the Israeli economy, and they’re very much linked to demographics.”

It doesn’t help that another election slated for early March is expected to cost the government about 534 million shekels ($154 million). For now, though, ratings agencies remain confident that Israel will eventually form a government and bridge the fiscal gap.

Economic Fallout

Rather than focus on the cost inflicted by politics, the Finance Ministry’s chief economist Shira Greenberg is pointing to warning signs in the labor market, including slower job creation.

“There is a slowdown that is not connected to the political situation,” Greenberg said in an interview last Thursday. “The economy will not pay a price now because of the political instability.”

The paralysis also hasn’t affected the shekel, one of this year’s top performing currencies, thanks to factors that not even a year of dysfunction could undo: Israel is continuing to run a current-account surplus, foreign investment is flowing in, and natural gas production is on the rise.

“Markets are blasé, and I guess they’re assuming ratings agencies will also be forgiving,” said Jonathan Katz, chief economist for Leader Capital Markets Ltd.

Israel's currency has been a persistent global top performer this year

With elections due on March 2, there won’t be a new budget at least before the middle of the year. Until then, the government will operate on monthly extensions of the current one.

“The economic impact is significant, economic reforms are stuck,” Orit Farkash-Hacohen, a lawmaker who represents Gantz’s Blue and White bloc on the finance committee, said in an interview.


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