Fighting costs

Attention has now turned to assessing the damage caused by the fighting – and to figuring out who will foot the bill for this damage.

IDF soldiers after returning to Israel from Gaza August 5, 2014. (photo credit: REUTERS)
IDF soldiers after returning to Israel from Gaza August 5, 2014.
(photo credit: REUTERS)
IDF troops are out of Gaza and the truce seems to be holding so far. Attention has now turned to assessing the damage caused by the fighting – and to figuring out who will foot the bill for this damage.
Tourism, which accounted for approximately 4 percent of GDP or NIS 3.8 billion in 2013, was probably the hardest-hit sector. This year was supposed to exceed last year’s record 3.6 million visitors by 15%. Now, according to Yossi Patel, CEO of the Tourist Agents Association, that won’t happen. Half of the most profitable season of the year has been erased. A fifth of tourism-industry workers are in danger of losing their jobs. According to the Hotel Association, recovery is not expected before Passover 2015, on condition significantly more resources are invested in marketing. Damage to the sector is estimated at NIS 1.3b.
The Manufacturers Association, meanwhile, estimated that member industries – which include manufacturers in both the public and private sectors – sustained a loss of NIS 1.2b. Production dropped mainly as a result of workers being absent from work altogether, or as a result of decreased productivity caused by disruptions.
Businesses in the South alone sustained losses of NIS 470 million caused by the fighting.
Agriculture was hit particularly hard. While the Iron Dome air-defense system shot down rockets headed for built-up areas, the largely open farming areas were left unprotected. Many Thai workers, fearful of being hit by rockets, abandoned their jobs, and Arab workers failed to show up for work as well.
Construction contractors in the South suffered losses.
Workers did not show up, marketing new housing stalled and, as a result, financing costs shot up.
The health system estimates that losses resulting from a combination of a decrease in income and a rise in costs have led to economic damage of between NIS 170m. and NIS 200m. Elective operations that boost hospitals’ incomes were postponed during Operation Protective Edge, while expensive and unprofitable emergency services and overtime pay for doctors and nurses were significantly expanded. Medical tourism was also severely hit.
Public transportation is another sector that was hurt.
There was a 35% to 40% decrease in bus passengers in the South and a 12% to 15% decrease in central Israel.
The blows to tourism, the manufacturers, the health system and transportation – among other sectors – will translate into lower economic growth and lower tax revenues.
Then there were the costs of the actual fighting. The Treasury estimates that each day of Operation Protective Edge cost NIS 200m. In all, including damage caused to property as a result of the rocket fire (damage which was relatively low, thanks to Iron Dome), the military expenses resulting from the operation are estimated at about NIS 6b.
To pay for all this, Finance Minister Yair Lapid and Prime Minister Binyamin Netanyahu have a few options.
One is to raise the budget deficit as a percentage of GDP – in other words, to increase the government’s overdraft and borrow more money. But this would undermine the international finance community’s confidence in Israel’s economic stability.
Another option is to raise taxes. But besides being a highly unpopular move (Lapid has promised he would not), a tax hike runs the risk of stifling already low economic growth.
Then there is the option of cutting the budget. Another across-the-board reduction in all ministry budgets (except Defense) might cover some of the loss. But this would weaken our already compromised health and social welfare services.
One positive step that should be taken is for Lapid to scrap his plan to do away with value-added tax on housing. Doing so would keep in place VAT revenues of about NIS 3b.
There are no easy choices for Lapid, Netanyahu and other members of the government. Operation Protective Edge could not be avoided. Not only does Israel have a right to defend itself, as America and other countries assert. It is more than that. Our government – any government – has a moral obligation to protect its citizens.
Now the government is facing another obligation – to steer the economy wisely and avoid a budget crisis.