New government faces tough choices

In what must rank as one of Israel’s weirdest election campaigns, the huge existential issues facing the nation were hardly touched on. There was no real debate on the Iranian bomb or on growing international impatience with Israel’s continued occupation of the West Bank. Now reality is about to strike with a vengeance.

As soon as the new government is formed, it will have to deal with a comprehensive European- led blueprint for peace with the Palestinians.

It will also have to develop a strategy to restore fractured ties with US President Barack Obama and to combat growing international isolation.

There are major economic challenges too.

The new government will have to come to grips with its fiscal cliff, last year’s massive 39 billion shekel ($10.5 billion) budget deficit, as it frames the budget for 2013 and produces a plan to bring down soaring housing prices. Then, in the summer, just a few months down the road, it may have to take a momentous decision on the Iranian nuclear threat – whether to bomb Iran’s nuclear installations on its own or trust the US to stop Iran going nuclear after it has crossed what Israel sees as the point of no return.

As if all that were not enough, there are two more major domestic issues on the national agenda: Changing the electoral system to create stronger and more coherent government, and drafting the ultra- Orthodox, mainly so that they can join the work force in large numbers and stop bleeding the economy.

The new European peace initiative aims to secure agreement on a Palestinian state in the 1967 borders with land swaps and with East Jerusalem as its capital. Spearheaded by Britain and France and strongly backed by Germany, it could become formal EU policy. John Kerry, the incoming US Secretary of State, is also keen to restart an Israeli- Palestinian process, and will likely throw his weight behind the European effort, and possibly even take the lead. The Europeans intend to add a regional dimension, and will invite Egypt, Jordan and the Gulf States to participate.

The idea is to discuss all the core issues, borders, security, Jerusalem and refugees, with the regional players helping out on Jerusalem, refugees and wider accommodation with Israel. The goal is to reach a comprehensive peace deal within a year.

If all the Arab players agree to come in, it will be difficult for Israel to stay out. The new government will have to do some serious thinking about bona fide movement towards a two-state solution or risk being branded the rejectionist party and facing international isolation.

The importance of Obama’s recently leaked comments about Prime Minister Benjamin Netanyahu acting against Israeli interests is not so much the intervention in Israeli politics or the soured relationship between the two men, but the substance of what the president had to say. If Israel continues to defy world opinion on the occupation and if the American President believes this will lead to international isolation, it could become a self-fulfilling prophesy.

Obama will not cut aid to Israel or downgrade strategic ties, but he may well lift America’s diplomatic umbrella. That would have major implications for Israel- Palestine on the world stage and for Israeli trade. That is not a place the new Israeli government will want to go.

All the more so if it wants international support against Iran in the summer. For Israel, the key question is how far advanced the Iranians will be by then. For a bomb they need a stockpile of around 250 kilos of 20 percent enriched uranium, which would then have to be further enriched to over 90 percent to produce weapons- grade fissile material. By last November they had stockpiled 135 kilos and since then have been producing another 15 kilos a month. At this rate they could have enough material by around August.

But the equation is not that simple. In the past, the Iranians have used much of their 20 percent enriched uranium to produce fuel for medical research, significantly depleting the amount available for potential weaponsgrade enrichment. Whether they have enough for a bomb by August will depend on how much they use for new fuel plates.

According to the Washington-based American Enterprise Institute, with additional centrifuges now operating in Fordow, the Iranians could significantly step up the rate of enrichment and have enough material for two bombs by late 2013 or early 2014.

Other US experts, including former UN nuclear inspector David Albright, estimate that Iran will have enough weapons-grade uranium for one or two bombs by mid-2014.

The new Israeli government may not want to wait that long. It may feel it needs to act before Iran goes beyond what it sees as the point of no return. Both Obama and Defense Secretary designate Chuck Hagel are committed to stopping Iran going nuclear, but not necessarily at Israel’s pace. This creates a dangerous disparity, which could lead to an Israeli strike. Only a credible American threat of force could persuade the Iranians not to proceed and Israel not to attack.

Before weighty decisions on Iran, the new government will have to address this year’s problematic budget. The 2012 budget deficit was supposed to be 2 percent of GDP, 18.3 billion shekels, but in actual fact at 39 billion was more than double. True, most of this deficit has already been balanced by more government borrowing from the public – last year it sold 113 billion shekels worth of government bonds and paid back 75 billion, leaving it with 38 billion to cover the deficit.

But this is money it still owes the public.

The outgoing government overspent mainly on defense, infrastructure projects and free kindergartens. According to exprime minister Ehud Olmert, it wasted 11 billion shekels on military preparations for a strike against Iran “that will never happen.”

It also collected less tax than in previous years, mostly as a result of cuts introduced by Netanyahu in 2011 against the advice of top Finance Ministry and Bank of Israel officials.

The new budget ceiling can go 13 billion shekels higher than last year’s, but the government has already made commitments of around 30 billion more, so that it needs to cut around 17 billion just to stay on budget.

Instead of at least some of these cuts, it could raise taxes. The question is what to cut and whom to tax. Defense, which made up a whopping 16.7 percent of last year’s budget, will be a prime target. So will corporate taxes.

Another possibility would be to raise the 2013 deficit from the already agreed 3 percent to say 4 percent, which would allow spending of another 9.5 billion shekels. But the Bank of Israel is strongly opposed, arguing that raising the deficit could trigger a downgrading of Israel’s credit rating.

One of the most urgent socioeconomic problems the new government will have to deal with is the housing crisis. During the outgoing government’s term, housing prices rose on average by 48 percent. The plan Netanyahu introduced in July 2011 to make more housing available and bring down prices was largely ineffective. In the third quarter of 2012, building starts were actually down by 37 percent compared to the same period in 2011.

The new government will have to free more land for building, ensure easy lines of credit for contractors, bring in enough building laborers to handle a host of projects across the country, and build affordable public housing. Up till now it has not been able to launch a coordinated master plan, partly because of red tape, with different authorities often working at cross purposes.

For example, although more land was zoned for building in 2011 and 2012, bank credit to contractors was limited. As a result, there were few takers to develop available building projects.

As things stand, the Interior Ministry is responsible for planning; the Housing Ministry and Israel Lands Administration for marketing of land; the Bank of Israel for mortgage and loan policies; the Finance Ministry for tax policy and the Trade and Industry and Interior Ministries for the labor force. There is a crying need for an executive department that controls and oversees all aspects of a grand nationwide housing plan.

If pre-election promises are to be believed, the new government will also consider changing the electoral system. The goal will be to strengthen governance by having fewer, larger parties and accountability by having a sizable number of Knesset Members elected in constituencies.

There are a number of proposals that have been doing the rounds for years now. For example: The leader of the largest party, not the largest bloc, automatically becomes prime minister, encouraging people to vote for the party led by their preferred prime minister and not one of the smaller parties in the same bloc; raising the threshold for election to the Knesset from 2 percent to around 5 percent, encouraging smaller parties to form electoral alliances; allowing voters to order the list of candidates for the party they vote for on election day, eliminating the need for expensive party primaries and avoiding the anomaly of people joining a party to influence its Knesset list and then voting for someone else.

The new government will also have to pass legislation to replace the now defunct Tal Law on drafting yeshiva students. If they follow the recommendations of the Plesner Committee set up by Netanyahu last year – and then ignored by him – the goal will be to cut the number of annual exemptions to around 1,500 exceptional Torah students, and to have around 6,000 others serving in the army every year. There would be financial incentives for the yeshivas whose students serve, and for the students themselves.

The importance of this is that after they serve, tens of thousands of yeshiva students will be able to join the work force, no longer having to claim full-time Torah study to avoid the draft.

But on this, as on all other major issues, much will depend on the composition of the new governing coalition. Israel faces a host of huge existential issues. The question is will it get a government able to handle them.