Netanyahu and Smotrich: How will they cover the deepening deficit? (Photo: Image processing, Walla system!)
A beautiful legacy was left by the previous government to the current government: a round sum of 30 billion shekels in the state coffers, handsome tax collection and appreciable economic stability after a record recovery from the corona crisis, which began at the end of the term of the unity government.
However, within four months the situation turned around: a minus of 300 million shekels in the coffers, an expected shortfall of tens of billions in the budget due to yet-to-be-realized coalition promises, a steep drop in tax collection and the danger of downgrading Israel's credit rating.
Prime Minister Benjamin Netanyahu is in the trap of 2023. Any way he chooses to deal with the problematic economic situation his government has found itself in, also because of global inflation, but also because of legal reform, may hurt him.
One way to solve it is
to raise taxes
.
But this will cause a public uproar, given his election promise to lower the cost of living, a task that has not yet been addressed and further increases in price may infuriate him.
Another possible way is
cuts in government spending
, but the meaning of such a step is the violation of coalition promises to its partners in the government, which will cause shocks in the coalition and may lead to the dissolution of the government.
A third way is
to deepen the deficit
, similar to what was done during the Corona period, when the deficit reached a minus of NIS 70 billion.
This may seem like the easy way out, but given the global sensitivity to Israel's economic situation, the deepening of the deficit will cause a drop in the credit rating, a blow that Netanyahu's international prestige, which is already under test, will have a hard time absorbing.
Prof. Omar Moab (Photo: Flash 90, no)
"There is no doubt that Netanyahu is in a big problem," says
Prof. Omer Moab of Reichman University, Warwick University and the host of the "Making Account" podcast
.
"The government's election promise was to lower the cost of living, the Prime Minister's speech after the victory in the elections talked about lowering prices, welfare and growth, and we discovered that nothing will move until the legal reform is introduced. The governmental coup has hurt the economy. There are data of a decrease in tax collection, Netanyahu needs to bribe his coalition partnership with public funds and we will pay the price.
"If he were to come down from the coup d'état, his voters would not accept it, because he was the one who warmed to them that they are second-class citizens, and he needs to find a creative way to get off the tree, the question is if he wants to get off the tree. Before the indictments were filed against him, he spoke In praise of the High Court and before that for the fat that sits on Reza's back.
He preached lean government, few taxes, and a strong private sector.
In practice, Netanyahu is inflating the government, increasing expenses, and now they are talking about collecting additional taxes."
How can Netanyahu extricate himself from this trap?
"The right thing to do is to announce that in light of the damage to the economy and Israel's standing in the world, the legal reform is being canceled.
He cannot continue to tell the Israeli public that the legislation will continue and in interviews abroad that he is stopping it, because a large part of the damage that has already been done is irreversible."
like what?
Moody's wrote that the State of Israel has proven to the world that it is relatively easy to change the rules of the game. A coalition of 64 MKs can abolish Israeli democracy.
Luckily we have the protesters, whose protest stopped Moody's from downgrading.
The damage has already been done, because when the investments stopped, the money moved to other parts of the world and it will not return.
Israeli companies were registered abroad and will pay taxes there, and a gap of 21% opened up between the average performance of the Tel Aviv Stock Exchange and Nasdaq, which means that the Israelis whose pensions were invested in Israel, They lost 12% of their value.
"Let's say that everyone is convinced and says, let's save the economy, the economy and the Israeli society, stop the reform, and make a constitution, so that in Israel and the world they will believe that this cannot happen again, we can try and rise again, but this is a fantasy.
The chances of this happening are low to non-existent.
What can happen is that Netanyahu declares a state of emergency, runs a big deficit, and the rating drops."
"But Netanyahu is afraid of lowering the rating, because he understands its dire meaning. Raising taxes is also bad. My fear is that they will raise the income tax, because our direct taxation is abnormally progressive compared to developed countries. The top decile pays more taxes than the average in the OECD and status The middle ones are less than average. The increase in income tax will increase the burden on the working public."
You don't even put on the table the option of waiving the distribution of coalition funds.
"Before the elections, I said that Netanyahu would submit to the blackmail of the ultra-Orthodox and the extreme right in order to avoid a trial. He was a strong, tough and blackmailable player in front of them, they were willing to stay in the coalition for less coalition funds, but they feel how weak he is.
Another parameter should be taken into account.
A governmental coup means the training of corruption, political appointments, the cancellation of the board of directors, legal advice from associates, including appointments based on kinship rather than qualifications.
The studies prove that corruption destroys the economy.
"Continuing the legislation is a disaster for Israel's economy. It will not necessarily happen in one day. The stock market will continue to fluctuate, the gap between the exchanges will increase, the shekel will weaken, but in the long term there will be total destruction here. We, the economists, were surprised, because things are much worse than what we predicted in the economists'
letter When investments stop, there is no business, no money, economic development stops and this will have wide and deep consequences.
Bibi's situation is on the face in any case. The question is, will he be able to sacrifice himself for the State of Israel and as it seems, he will prefer his personal interests over We turned."
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Tags
Cost of living
deficit
coalition agreements
Credit Rating
raising taxes