We’re beyond the point of speculation: the coronavirus has now become a global pandemic, with new cases being reported in Europe and the US on a daily basis. So far, Israel's efforts to contain the virus have been exemplary and effective, despite some claims that the government's measures have been excessive. But there is one aspect of the outbreak which the Israeli government has so far been reluctant to deal with.
Public health crises always trigger financial and economic crises, and the COVID-19 outbreak is no exception. China’s economy is forecast to post zero level growth stats for the first quarter of 2020, and mass quarantines in Europe have caused investors to fear a global recession may be just around the corner. Two months into the global panic, Israel is now facing a similar situation.
Government inaction in the name of fiscal prudence will most likely result in disaster both for public health and the economy in Israel
The coronavirus outbreak represents a dual threat to Israel's economy. Firstly, the panic has triggered a sharp fall in demand, with many choosing to avoid spending time in shopping centers. In addition, government quarantine instructions have dealt a heavy blow to Israeli businesses, particularly in tourism and air travel. El Al, Israel's famous national airline, is now on the brink of collapse, and has threatened to lay off up to 1,000 employees.
What is more, businesses are now facing the threat of mass quarantines affecting their employees. Under Israeli law, employers are required to pay full salaries to quarantined workers, which becomes an even heavier burden when compounded with the effects of plummeting demand nationwide. Unions and business leaders have demanded that the government subsidize sick leave to allow workers to follow quarantine orders. Unless workers receive sick pay in full, they are unlikely to follow quarantine orders, which could severely harm the government's chances at containing the outbreak.
Business leaders gathered in Tel Aviv yesterday (Tuesday) and made it quite clear that they are preparing for a worst-case scenario, in which Israel enters a recession. One crucial thing to understand about recessions is that when business leaders and investors believe that they are close, the risk of them occurring increases exponentially. This is known as the Pygmalion Effect, and is exactly the kind of risk Israel is facing today. Put simply, business leaders expecting falling demand due to quarantines stop investing and try to cut expenses. This means firing large parts of their workforce, which leads to a fall in overall income, which leads to lower levels of spending, which in turn leads to a plunge in demand, ultimately resulting in a recession.
All else being equal, this seems a likely but catastrophic outcome in Israel. And yet, the government has been mostly silent on the issue, giving hardly any assurance that it will step in to prevent businesses from collapsing or workers from being fired. While working relentlessly to contain the spread of the virus, the government seems to have decided that when it comes to the economy, the market will have to face the virus alone, come hell or high water. This, of course, will have disastrous effects on Israel’s poorest and most vulnerable .
To understand the reason behind this bizarre stance, it is important to recognize the fixation Israeli politics has with government deficits. To many politicians in Israel, hardly anything evokes more anxiety than the specter of rising levels of government deficit or debt. Hardly anywhere in the world has the neoliberal ideal of public book-balancing gained such widespread approval from politicians across the political spectrum as it has in Israel. Israel recently posted deficit levels of 3.8 percent of GDP, which triggered a deluge of calls for public spending cuts and various austerity measures, even though Israel's deficit is still one of the lowest among developed nations. Still, many in Israel's political system quite simply believe that the government cannot afford to prevent its economy from suffering a recession, and that, unfortunate as it might be, the public must be left to fend for itself.
Unfortunately for those devout market followers, it seems unlikely that the laissez-faire policies will be effective in containing the outbreak and preventing economic collapse. On the contrary, government inaction in the name of fiscal prudence will most likely result in disaster both for public health and the economy in Israel. The government has the responsibility to ensure both the health of its citizens and their financial well-being, and to do so it must immediately approve an emergency spending package. Israel is no stranger to states of emergency, and strong government action has always been a critical component in dealing with them. And yet, the government is showing no signs of stepping up to the plate.
Unless the government approves an emergency spending boost, Israel's health services might find themselves short of the resources needed to battle COVID-19
Shockingly, instead of introducing a stimulus package, government spending actually fell in February. The government posted a 2.6 billion-shekel surplus last month, which translates into a 5.5% fall in public spending compared to February 2019. The effects of this on Israel's already underfunded public health services are especially worrying. Unless the government approves an emergency spending boost, Israel's health services might find themselves short of the resources needed to battle COVID-19, or else those resources may come at the expense of other health services.
In doing this, the Israeli government is ignoring advice from major global financial institutions. Just last week the OECD issued a call to member governments, urging them to increase spending to bolster their economies in the face of coronavirus. President Trump seems set on approving a fiscal stimulus package, and even the EU has declared that it is giving its member states free reign to spend regardless of the implications for government deficits. To those who might have forgotten, this is the same EU that in 2010 sent almost a quarter of its members spiraling into the deepest recession since the 1930s, just to avoid a rise in public debt. Is it possible that when it comes to social and economic policies, the Israeli government is even further to the right than Trump or the EU?
Israel is currently running on an interim budget, after almost a year and a half of political deadlock. This in itself means that the budget is lower than it would otherwise be, which effectively constitutes an automatic spending cut. Even so, there is nothing stopping the government from approving an emergency spending package. In times of national emergency, the Israeli government always finds ways to fund actions needed to safeguard the public. The government has the means at its disposal, and now it must find the will to act.