Bezalel Smotrich, Israel's Minister of Transport, volunteered yesterday to find a funding source for the efforts to deal with the COVID-19 crisis: cuts in public sector wages. In a letter sent to Minister of Finance Moshe Kachlon, Smotritch called for a NIS 2 billion cut in public sector wages. Apart from the blatant immorality of such a step, it will also cause great economic harm to Israel's recovery from the crisis.
Firstly, this has to be said clearly: The public sector has already paid a heavy price due to the crisis. In the two agreements reached between the MoF and the Histadrut, public sector workers have agreed to forgo the entirety of their annual paid leave. There is no basis for claiming that the public sector has been immune to the negative effects of COVID-19.
But the true problem with Smotrich's suggestion is that it will impair Israel's economy's efforts to quickly return to growth after the crisis.
Firstly, a budget cut in the public sector will mean spending cuts, and if there's one thing that we've learnt from the crisis is that the public sector is a crucial asset in times of crisis. One can only imagine the state Israel would have been in with even less resources available to the healthcare system. Israel's funding of its healthcare system is so poor as it is, that additional cuts would have dramatically impaired Israeli hospital's ability to care for coronavirus victims.
The crisis should teach us a valuable lesson about the importance of a highly functioning public sector. The state's ability to care for its citizens in times of crisis depends on the funding available to its public services.
Secondly, public sector wages are a great asset when it comes to the economic recovery. Demands will fall dramatically even after the economy returns to full activity. The extent of the recession brought on by the coronavirus crisis will become apparent only in a few weeks time, when social distancing restrictions will be lifted. Many Israelis will suffer a drop in wages and many others will face unemployment.
To kick-start the economy, the government will have to spend large amounts in an effort to stimulate economic activity. The fact that a large number of workers in Israel have not suffered income loss and will retain their purchasing power is a huge asset, which will help stimulate the Israeli economy quickly.
Thirdly, the government has much easier and less harmful ways to fund its spending. Israel has one of the lowest rates of debt to GDP, and can easily raise that money it needs. Another option open to the government is funding via the Bank of Israel, just like the British government has been doing in the past week.
The stimulus package needed to take Israel out of the recession caused by the coronavirus will be much larger than what is available to it through spending cuts. The message to the government should be clear – Israel needs much more government spending, funded by the government and not by the public.