Once Israel forms a new government, it will move fairly rapidly to approve a two-year budget that will encourage growth at least through mid-2022, according to Jonathan Katz, chief economist at Leader Capital Markets.
“For now, the budget doesn’t need any consolidation or tighter fiscal policy,” Katz said. “No big cuts are needed now. The country is recovering from the corona crisis, and there is no need to reduce demand. The thing to do now is to concentrate on encouraging economic growth and recovery without raising taxes or reducing the deficit, which is the same thing as the OECD is recommending for all of its countries.
“Israel’s tax revenues so far this year are already showing signs of recovery, and we’ll probably have a deficit of 6%-7% this year. Then, as emergency measures for corona come to an end in 2022, we’ll see a 5%-6% deficit. In June 2022, the government will have to look at fiscal policy for 2023, and then we’ll have a multi-year target of reducing the deficit. This could include higher taxation and a gradual reduction of government subsidies once the recovery is well-entrenched.”
The new government will look to make heavy structural reforms and investment in infrastructure, transportation, and real estate, said Alex Zabezhinsky, chief economist at the Meitav Dash investment house. Zabezhinsky, like Katz, expects the state to reduce subsidies to haredim (ultra-Orthodox) in an effort to encourage them to join the workforce in greater numbers. Those funds can be reinvested in education instead, Zabezhinsky said.
Israel’s current economic situation, as it moves to recover from the pandemic, may actually provide the opportunity to invest more aggressively than it could otherwise, Zabezhinsky added.
“Normally, increasing government spending and expanding the deficit would be scary for the credit rating agencies,” Zabezhinsky said. “But they understand that deficits are inflated and that risk is higher than usual, so spending more on infrastructure shouldn’t sound any alarms.”
Israel’s most important needs right now are to bring job seekers back into the job market, increase professional training for low-skilled workers, and to invest in environmentally friendly infrastructure projects that will feed the recovery, said Daphna Aviram-Nitzan, director of the Center for Governance and the Economy at the Israel Democracy Institute. She expressed optimism that the incoming government will be able to push forward strongly on all of these fronts.
“Forming a government and approving a budget after everything we have experienced is the best possible economic news Israel could hope for,” said Aviram-Nitzan. “Many large and long-term projects that have been proposed in the past two years have been unable to be approved and implemented. I hope the new government will be ready to move the economy forward.”
Yisrael Beytenu head Avigdor Liberman, who is pegged to be the finance minister if Yair Lapid's coalition forms the next government, echoed many of these ideas in his address to the Channel 13 conference Thursday.
"This coalition will focus mainly on economic issues," Liberman said. "The State of Israel has been without a budget for two years. We see the unemployment, deficit and debt-to-GDP ratio data and understand that our biggest challenge right now is to rebuild the economy."
"The need to produce here is growth, and to increase the budget but not the deficit," he continued. "Raising taxes is not an effective step. Burdening the population that works is neither smart nor enough. We must come up with a comprehensive plan that addresses all the components, including tax revenues and collection as well as employment.