Economic test

With a broader coalition of 66, the government is better positioned to pass a budget that addresses and seeks to solve economic difficulties facing the nation.

By
May 22, 2016 21:46
3 minute read.
money

Shekel money bills. (photo credit: REUTERS)

 
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In the wake of the surprising political developments that led to the addition of Yisrael Beytenu to the government, most attention locally and internationally has focused on the ramifications of Prime Minister Benjamin Netanyahu’s decision to choose Avigdor Liberman over Moshe Ya’alon as defense minister.

In the process, all but forgotten is the challenge lying ahead for the newly expanded government: passage of a two-year budget aimed at setting the economy back on track.

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Indeed, the timing of Yisrael Beytenu’s entry into the government is directly related to the budget, which will become the focus of parliamentary activity as the Knesset’s spring recess comes to a close and MKs return to work this week. Netanyahu did not want to begin negotiating a two-year budget for 2017-2018 with a coalition that rested on a razor-thin majority of one. Attempting to do so would have exposed the government to pressures from MKs within the Likud or from the smaller parties who would have leveraged their threat to topple the government if they did not get what they wanted.

With a broader coalition of 66, the government is better positioned to pass a budget that addresses and seeks to solve economic difficulties facing the nation.

Just last week, Bank of Israel Governor Karnit Flug warned that the budget deficit for 2017 would exceed 2.5 percent of GDP. She recommended either budget cuts – which would hurt long-terms goals of improving infrastructure and services – or changes in taxation that would include raising taxes and abolishing tax breaks.

Will Liberman, presumptive incoming-defense minister, attempt to amend the economic elements of Gideon – the IDF’s five-year plan – agreed upon last November between Ya’alon and Finance Minister Moshe Kahlon? The defense budget makes up a whopping 16% of the total fiscal budget. Any additions to the budget could make it harder for the government to stay within fiscal guidelines.

In addition to maintaining fiscal discipline, there are a number of specific economic challenges facing Israel the government must address.

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Economic forecasts are predicting a slowdown of economic growth worldwide. Demographic developments such as the rise in the relative size of the Arab and haredi populations are expected to dampen economic growth locally. Still, there are encouraging signs of change: larger numbers of Arab women and haredi men are entering the labor force. These trends should be encouraged.

Low productivity is a major problem in the country, primarily in fields in which the local market is not exposed to international competition. Israel could improve its standard of living by 30% if the Israeli worker’s productivity reached the level of the OECD average.

Construction is a field, for instance, that employs 7.5% of the business sector and is not exposed to competition.

Productivity in this field has been stagnant since the 1990s. Construction in Israel relies on cheap, easily available foreign workers. There is no incentive to introduce improved technological methods. Plans to allow foreign building contractors to build in Israel will put pressure on local builders to increase their efficiency.

The government must continue to push for bringing international building firms to Israel and not cave in to pressure from powerful interest groups.

Another place where there is plenty of room for improvement is the local business environment. The World Bank’s Doing Business index ranked Israel 53 out of 189 countries, including dozens of third-world countries. Among OECD countries, Israel is ranked 31 out of 34. Processes such as opening a business, obtaining permits and paying taxes are prohibitively difficult in Israel compared to other countries. This not only makes it more difficult for Israelis to do business, it also discourages foreign investors from investing here.

Local and international focus on Ya’alon’s departure and Liberman’s arrival is understandable. But our leaders must not forget the decision to broaden the government coalition was made in large part out of a need to ensure the swift passage of a fiscal budget that will improve the economy.

Controversy surrounding the cabinet shuffle might be commanding public attention, but the grim realities of Israel’s economic challenges are not going anywhere. The newly enlarged government has a duty to address these challenges as it formulates economic policy for the next two years.

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