“The budget will not be a simple one,” Finance Minister Yuval 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
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
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
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
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."
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
“Countries that avoid discipline," he concluded, "absorb
difficult hits to their economy and society."
Yoni Dayan and Globes contributed
to this report