The most pressing economic issues facing the next government

The competition for resources and the need to approve a budget will all be conducted in the shadow of an increasing fiscal deficit.

September 19, 2019 02:28
3 minute read.
Collage of Prime Minister Benjamin Netanyahu and former IDF Chief of Staff Benny Gantz.

Collage of Prime Minister Benjamin Netanyahu and former IDF Chief of Staff Benny Gantz.. (photo credit: GALI TIBBON/POOL VIA REUTERS & MARC ISRAEL SELLEM/THE JERUSALEM POST)

The long, bumpy road to building a new government coalition is only just being paved, but the politicians who will eventually be tasked with managing Israel’s economy can expect no easy ride.

The nation’s unprecedented double election season has left policy-makers with its hands tied in recent months, unable to implement significant measures to tackle Israel’s economic needs, including its growing fiscal deficit and passing a new government budget.

So what exactly are the most pressing economic matters facing any future government?

If the complicated and arduous matter of coalition-building does succeed, negotiating and approving a new government budget will be one of the first tasks facing incoming ministers.

The government’s current two-year budget is due to run until the end of the year, and has been provisionally extended into 2020 on a rolling monthly basis based on current agreements.

Budget-related demands will inevitably become a key element of coalition negotiations, with prospective ministers fighting for increased funds in all sectors and especially in defense, health and education.

Yet the competition for resources and the need to approve a budget will all be conducted in the shadow of an increasing fiscal deficit. According to data provided by the Finance Ministry earlier this month, the deficit has swelled to a record 3.8% of GDP over the past year, significantly above the government’s target of 2.9%. The ministry projects a total deficit of 3.6%, or NIS 50 billion, during 2019.

Bank of Israel Governor Amir Yaron warned the government in April that the combination of increasing government expenditure and the simultaneous reduction of taxes is increasing the nation’s structural deficit to an “undesirable” and potentially dangerous level.

The next government will need to show significant financial discipline, and might need to make some unpopular decisions in order to balance the nation’s fiscal books.

An additional area of immediate concern for the next government will be Israel’s education system. According to a report published last week by the Organization for Economic Cooperation and Development (OECD), national expenditure on education as a share of GDP is among the highest in the developed world, but Israel still spends significantly less per student than most other countries.

Total expenditure as a share of GDP increased by 8% between 2010 and 2016, the highest across all OECD countries, and Israel currently spends the equivalent of 6% of its GDP on primary to post-secondary education.

Faced with rapid population growth and many more children to educate in the coming years, long-term planning for the country’s education sector and increased investment will be necessary if Israel wishes to catch up with its OECD counterparts.

Another OECD report published in April highlighted another issue necessitating government action: Israel’s weak labor productivity.

Facing higher income distribution inequality than most advanced economies, the gap in GDP per capita between Israel and the upper half of OECD countries has remained at approximately 30% for almost a decade. While Arabs, for example, represent approximately 20% of Israel’s population, they contribute only 8% to its gross domestic product .

To increase economic growth and make growth more inclusive thereby boosting GDP per capita, the OECD said Israel must continue to prioritize improving education outcomes for disadvantaged groups. Improved integration of Arab and ultra-Orthodox populations into the workforce is critical to boost productivity, and to enable all of Israel’s diverse society to enjoy the country’s economic success.

Finally, the next government will need to work diligently to confront Israel’s inadequate transportation infrastructure problem. A March report by then-state comptroller Joseph Shapira revealed that public transportation is facing a deepening crisis that is not only making daily life hard for commuters, but harming the economy to the tune of billions of shekels every year.

According to a 2012 report published by the Finance and Transportation ministries, inadequate transportation led to an annual loss of NIS 15b. for the economy, based on Israel’s 2010 GDP. This is expected to soar to NIS 25b. annually by 2030, with overcrowding on Israel’s roads expected to worsen further.

Reducing dependence on private cars, which have increased in number by 91% since 2000, will provide a significant boost for Israel’s economy, commuter mobility and the environment.

With many important issues on the next government’s economic to-do list, there’ll be no honeymoon period for any prospective coalition.

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