The good, the bad and the ugly of Israel’s 2023-2024 budget

POLITICAL AFFAIRS: The government can’t help itself, and is feeding the flames by sparking crisis after crisis, controversy after controversy.

  MK YINON AZOULAY and colleagues vote during a Finance Committee meeting at the Knesset on Tuesday. (photo credit: YONATAN SINDEL/FLASH90)
MK YINON AZOULAY and colleagues vote during a Finance Committee meeting at the Knesset on Tuesday.
(photo credit: YONATAN SINDEL/FLASH90)

This Wednesday, the Knesset will likely pass into law seven bills that together make up the 2023-2024 budget, ending nearly a month of intense debate, political wrangling and high drama.

The coalition will breathe a sigh of relief. After spending the first three months of its legislation time on a judicial reform that did not pass, it will now be able to cast itself as a functioning entity and present its constituents with a series of achievements.

Budgets set priorities, and setting priorities always draws criticism. What does this budget say about the government’s priorities?

The good parts of the new budget

The budget and accompanying bills include five flagship programs, according to the Finance Ministry.

The first is a massive national infrastructure bill. Building infrastructure in Israel takes longer than in other countries, leads to significant economic damage and causes harm to the public. The national infrastructure bill aims to remove bureaucracy and regulation barriers in order to shorten the timetables, thereby reducing the congestion on the roads and ensuring electricity supply, as well as promoting renewable energy projects and many other infrastructure projects.

 Israelis attend a protest march in Bnei Brak against the billions in funds provided to ultra-Orthodox parties in the state budget, on May 17, 2023. (credit: AVSHALOM SASSONI/FLASH90) Israelis attend a protest march in Bnei Brak against the billions in funds provided to ultra-Orthodox parties in the state budget, on May 17, 2023. (credit: AVSHALOM SASSONI/FLASH90)

The purpose of the second plan, the Municipal Tax Fund, is to lower housing costs by incentivizing municipalities to build residential housing instead of commercial real estate. One of the causes for insufficient supply – and thus high prices – of housing in Israel is that the law incentivizes local authority leaders to earmark land for commercial use by setting a higher municipal tax rate for commercial real estate than for residential real estate. The ministry’s solution is to force wealthier local authorities to contribute to the fund a portion of their earnings from commercial real estate, and the fund will then redistribute them in the form of a stipend for every residential housing unit approved.

The third plan, slashing regulations on food and toiletry imports, aims to reduce the cost of living in food products and toiletries by adopting European regulations on a long list of products, and promoting other measures to reduce centralization and increase competition in the field.

The fourth plan aims to help many Israelis avoid a situation that many are not aware of, whereby they pay health insurance to two different entities – one automatically deducted from a paycheck, and the other as a payment to an HMO – but in insurance claims receive only one payment.

Finally, the fifth plan, to ease regulation on small businesses, includes a number of steps to optimize small business owners’ dealings with tax authorities.

In addition to these flagship programs, the government also took a number of steps intended to assist middle-class families with two working parents, by giving tax breaks.

For children aged 0-3, the government announced a plan in April whereby government subsidies for public daycares will rise from NIS 1,100 to NIS 1,700 in the upcoming school year. In addition, beginning in 2024, households with working parents will receive a NIS 940 per-month tax break.

For children aged six to 12, the government announced in April that it will extend until the end of 2023 a tax break initiated by the previous government worth NIS 2,820 for each parent per year, for each child. Beginning in 2024, parents of children aged 12-18 will also be eligible for this tax break.

The bad of the new budget

Two of the five flagship programs listed above raised sweeping criticism.

The first is the reform in food and toiletry prices. One of the reasons for the high prices is the lack of competition among importers, some of which enjoy exclusive import rights on swaths of products. The original budget proposal included a measure aimed at breaking open the import market for competition by blocking these exclusive rights.

However, this measure was removed from the budget proposal in its early stages, and its removal raised suspicions that the large importers’ lobbyists had succeeded in blocking it. The ministry claims that the reason the reform was removed was due to reservations by many small retailers. The ministry pledges that the reform will be improved and brought forward at a later stage.

The second flagship program that drew intense criticism and even a strike this week by the Federation of Local Authorities in Israel, is the Municipal Tax Fund. According to the FLA, the plan is seriously flawed.

It essentially penalizes well-run municipalities by taking a chunk of their earnings, and could even lead to the financial collapse of some municipalities; it discriminates against Arab authorities, which do not enjoy sufficient government urban planning and therefore cannot market as many housing units; and the ministry could later on easily change the fund’s status and use it for other purposes.

Another problematic aspect of the budget emerged this week after a macroeconomic assessment update by Finance Ministry Chief Economist Shira Greenberg predicted a drop in expected GDP growth compared to the previous assessment in January, and consequently a NIS 16.2 billion drop in state revenue. The current budget, in other words, is based on income that the government will not actually have.

This means that the government will likely create a larger fiscal deficit than previously expected – 1.1%-1.35%, according to the forecast, as opposed to the previous 0.8%-0.9%.

But this is still far better than the predictions of Bank Hapoalim and Meitav, which in April forecast that the budget deficit could reach 3% in 2023.

The forecast notes global economic slowdown as a factor that affected the negative update. But it also takes into account the uncertainty surrounding the government’s proposed judicial reforms, which will continue to harm the economy as long as the uncertainty persists. Greenberg wrote that her forecast assumed that the reforms will not pass in their original form. However, if the coalition begins to push through even parts of the reform once the budget passes – the uncertainty and instability could lead the economy to suffer further.

The ugly parts of the new budget

The ugly, and perhaps devastating, aspect of the budget is the coalition funds.

Coalition funds are a legal way to fulfill political agreements with budgetary implications made during the coalition agreements, ahead of the formation of the government. This time, the coalition funds add up to over NIS 13.6b. for the 2023-2024 period, over six times the coalition funds spent by the previous government during the 2021-2022 period.

In particular, approximately NIS 3.7b. of the funds are earmarked for private or semiprivate haredi schools or yeshivot that are not required to teach core nonreligious subjects such as English or mathematics; and another NIS 1b. is earmarked for food coupons that haredi families will likely enjoy disproportionately.

This would be a double blow to the future of Israel’s economy. Not only would the country be ensuring an insufficient education for the fastest-growing part of its population, it would also be incentivizing that same population not to work, in order to enjoy the food coupons and other welfare benefits, according to Prof. Dan Ben-David, founder and head of the Shoresh Institution for Socioeconomic Research and a senior faculty member in the department of public policy at Tel Aviv University.

“‘Scandalous’ is not a strong enough word for what the budget will do to the country,” Ben-David said.

He lays out some facts. Haredi families on average have 6.6 kids per family, as opposed to approximately two in the secular Jewish population. The haredi share in the population doubles approximately every 25 years. The share of prime-working-age haredi men with academic degrees has remained low and steady since 2004; and for nearly 50 years, since the late 1970s, the employment rate of haredi men is nearly identical to the employment rate of men in the general public with 0-4 years of education.

The problem in education, however, is larger than just the haredi sector – it is an acute national problem. Arab-Israeli students, for example, who make up 23% of current first graders in Israel, scored worse in their most recent PISA exam than nine out of 10 Arab countries. And among religious-Zionist students, who, of all the sectors, receive the most funds per student, the level of math, science and reading is below 80% of those in other developed countries, Ben-David explains.

Add to this the following: In nine years, Israel will become the most congested country in the OECD; and in 42 years, by 2065, the country will be among the top 10 congested countries in the world, and the other nine are among the poorest, according to Ben-David.

Put frankly, half of the kids in Israel are receiving a Third-World education, and they are mainly from the fastest-growing parts of the population.

“Third World education means a Third World economy. A Third-World economy cannot maintain a First-World public health system or welfare system, or a First-World army. And without an army – that’s where the problem becomes existential,” Ben-David said.

“This is not now, not next year and not the next decade. But there will come a point when it will no longer be possible to reverse this in the Knesset” due to demographics, and that point may be today, Ben-David said.

“I don’t think there is anyone who knows this more than [Prime Minister Benjamin] Netanyahu. And yet he is personally burning down the future of Israel. This is unconscionable,” Ben-David said, adding that this was not a matter of Right or Left, but a matter that unites economists from all sides.

The bright side, according to Ben-David, is that an unprecedented number of people are going out in the streets, and out of their comfort zones, as they are beginning to understand what the future may look like. People who for years could not care less were protesting every week, Ben-David said.

“It began with the protest against the legal overhaul, but has grown far beyond this. What we are seeing is a glimpse of the future – a group that is still a minority allied itself with a prime minister accused of corruption, whom no one else will go near to, in order to set down rules that they, in any case, will be able to set down in a number of decades because of their majority,” Ben-David said.

Israel has a history of overcoming overwhelming odds – it did so during the War of Independence, during the hyperinflation in the 1980s, and many other times. It is a country that knows how to deal with crises, and this, according to Ben-David, is the mother of all crises.

“I don’t think it’s an overstatement to say that we are in a second War of Independence. All of the odds are stacked against the ability to save the State of Israel, but on the other hand I don’t think anyone from either side expected the vehemence and magnitude of the protests,” he said.

The government can’t help itself, and is feeding the flames by sparking crisis after crisis, controversy after controversy. This contributes to the understanding of what the future could look like – and Israel’s strong and resilient civic culture, from both the Right and the Left, is pushing back.