The reimbursement scheme introduced by the Israeli government, as part of its attempt to incentivize employers to return workers from furlough, is an excellent example of the penny pinching attitude with which the Ministry of Finance has been handling the crisis for the past two months. What is framed by MoF press officers as ‘skinny’ and ‘efficient’ aid schemes are in fact attempts to minimize costs at a time when the government should be doing just the opposite.
In an attempt to address Israel's historically high levels of unemployment caused by the coronavirus crisis, which has by now reached over 20 percent unemployment, the MoF’s plan would offer employers a NIS 7,500 payment, spread over four months, for each worker returned from furlough, starting from the 1st of June. This may sound generous at first, but when calculated as monthly payment the scheme would offer NIS 1,375 per returned worker. In other words, 35 percent of the minimum wage, and only 13 percent of the average wage.
What the MoF officials may have forgotten is that while their penny pinching strategy might help mitigate the rise in the government’s deficits, under-spending in the present will cause a deficit spike in the near future. Government spending is a crucial part of preventing economic meltdown in the months after COVID-19. The more frugal the government chooses to be in its response, the deeper and longer the recession. Of course, recessions cause government incomes to fall due to low business revenues, and they come with high automatic spending on social issues. In short, what seems like a good short term plan will very soon prove disastrous both for the economy and for public finances.
Governments around the world have been pouring money into their economies, despite soaring deficits. The US congress approved a $2.2 trillion stimulus package, with Democrats pushing for another $2 trillion to be spent on lifelines for businesses and households. Just this week the German government announced its intentions to acquire 20 percent of Lufthansa’s shares for no less than 8 billion euros, and the British government is currently paying 80 percent of furloughed workers salaries, in an effort to keep workers employed with the staggering price tag of £84bn. None of these governments are known for their generous spending habits, and yet despite Britain’s Office for Budget Responsibility predicting that high deficits will persist well into 2024, this week the British chancellor announced a further round of government support for businesses dubbed Project Birch.
The prevailing mindset in the Israeli MoF, however, has been very different. From the very start, the MoF has acted as a buffer, blocking attempts to distribute more generous government support. The reason for this has been, as always, the threat of the deficit – with government officials warning against increased spending.
It seems that the MoF has taken an even more conservative position when it comes to government spending in face of the coronavirus crisis than the Bank Of Israel. Earlier this week, Amir Yaron, chair of BoI, made an uncharacteristically direct call on the government to increase spending in order to shield the economy from a major recession. “The crisis has created a new state of affairs under which high levels of government spending are necessary to prevent lasting damage to the economy.”