Preparing for what promises to be a bruising fight over the next budget, Finance Minister Yuval Steinitz urged "responsibility and discipline" in economic policy Wednesday.
“The budget will not be a simple one,” Steinitz said at the Globes Finance and Capital Markets conference in Tel Aviv's David Intercontinental Hotel. "The thing that is most important economically and socially - they go together - is high growth and low unemployment."
Tuesday's unity government agreement, which canceled early elections, shortened the timetable for the Finance Ministry to submit its budget from March 2013 until July 2012, leaving the ministry scrambling. The government is tasked with reducing the budget by NIS 6.6 billion, according to Globes.
Though there were no new budgetary numbers set yet, Steinitz repeatedly warned that populist economic demands posed grave dangers for Israel's economy, saying that growth was more important than "applause." In the last year, the ministry faced stringent opposition to budget cuts from defense officials, labor unions and the social justice movement. There will also likely be a need to raise income taxes and the value added tax, always unpopular decisions.
Despite the time crunch imposed by the unity deal, Steinitz emphasized that "a broad coalition is a blessing for the economy" because it can act decisively and prevent uncertainty. Some of the biggest economic worries in Europe, which could have negative repercussions for Israel's own economy, result from governance problems, he said. Sunday elections installed a socialist president in France and empowered anti-austerity parties in Greece.
Steinitz went to great lengths to defend Israel's economic record, which has looked less attractive given Wednesday's decision by credit rating agency Moody's to downgrade Israel's banking system outlook from "stable" to "negative," and growing unemployment.
In its report, entitled "Banking System Outlook: Israel," Moody's predicted that GDP growth would decelerate significantly in 2012, mainly due to weakening export demand stemming from the unresolved euro zone crisis. The government expects growth to fall from 4.8 percent last year to 3.2% this year.
Moody's was also pessimistic about Israel's security outlook, emphasizing "growing geopolitical tensions" that could compromise business confidence and economic activity. The agency singled out the Iranian nuclear program and the Arab Spring, which it referred to as "changing political landscape in neighboring countries."
Maintaining the unemployment rate is another challenge for Israel's economy. Though the government proudly touted its 5.4% percent unemployment rate at the end of 2011, the Central Bureau of Statistics revealed in April that its measurement methods were not in line with OECD standards, and the real unemployment rate was closer to 6.5%. It has since risen to 6.9%.
According to Steinitz, Israel needs to add 50,000 new jobs each year to keep unemployment on par with natural growth. Any efforts to distract from a pro-growth budget, he warned would ultimately raise unemployment further and reduce household income.
“Countries that avoid discipline," he concluded, "absorb difficult hits to their economy and society."
Yoni Dayan and Globes contributed to this report.