Analysis: With budget off the table, early elections will be felt by economy

Cost of housing will be another victim of early elections.

December 3, 2014 04:24
2 minute read.
Bank Hapoalim

A Bank Hapoalim branch in Tel Aviv. (photo credit: REUTERS)

Prime Minister Benjamin Netanyahu’s decision to dissolve the Knesset and go to early elections is slated to have serious repercussions for the Israeli economy in the coming months.

Most glaringly, the coalition’s collapse means Finance Minister Yair Lapid’s 2015 budget proposal will not be approved in the Knesset. Without a budget in place, the government follows an automatic plan that mimics the 2014 budget on a month-to-month basis.

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Because the 2014 budget had a lower deficit target than the one Lapid proposed for 2015, the automatic plan may be better from a fiscal responsibility perspective, according to IBI Investment House CEO Ido Cook.

Without costly programs like the zero-VAT plan, costs may fall, though the Finance Ministry estimates that the elections themselves will cost between NIS 1.5 billion and NIS 2b., according to Globes. The worry is on the revenue side, where a slowing economy could produce lower tax receipts.

The lack of a budget plan means that planned increases in social spending and increased defense budgets will not go into effect, which could hurt schools, the welfare system and military plans.

It will also leave Israel’s economic policy in the air well beyond the elections. In 2013, when elections were held in January following the failure to pass a budget, the new spending and taxation plan was not in place until the end of July.

With the 2015 elections not expected until March, it could take even longer to have a new plan in place.

“Calling elections before approving a budget will hurt confidence in the Israeli economy and the shekel badly,” an analysis by foreign exchange company FXCM Tuesday morning said.

Already, the uncertainty over government policy and how Israel will manage its moderating economy has weakened the shekel, which fell to a rate of nearly 4 against the dollar after peaking around 3.4 over the summer.

Though the weaker shekel shows a shaking confidence in Israel’s economy, it may be good news for exporters, who struggled to sell relatively expensive goods on the world market when the shekel was stronger.

The cost of housing will be another victim of early elections.

Since March, when Lapid announced his zero-VAT plan to give some young couples a big tax break on new homes, many potential buyers decided to wait until the plan came through to buy. Even as the number of transactions in the market dropped, prices continued climbing. Now, with the plan off the table altogether, many of the people who waited will decide to finally put offers on apartments, which will set prices surging.

The same effect, however, was expected as soon as the plan becomes law, and economists warned that it would further increase housing prices by elevating demand.

Politicians, of course, were quick to blame each other for the expected economic fallout.

On Tuesday, Lapid slammed Netanyahu for calling “unnecessary elections that will harm the economy and Israeli society, all for narrow political interests and a surrender to the ultra-Orthodox parties, the powerful central committee of the Likud and outside lobby groups.”

Netanyahu’s Likud party countered that “Lapid failed spectacularly in managing the economy.”

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