Last week, the Consumer Price Index (CPI) increased by 0.3 percentage points, reaching an annual level of 5.3%. Economists estimate that the index, which reflects inflation levels, will now begin to decline. They attribute this likely decline not to the plan presented by Prime Minister Benjamin Netanyahu and Finance Minister Bezalel Smotrich last week, but to the changing trends in drivers of inflation around the world.
Since the beginning of 2021, prices have increased by about 7.8%. Someone whose salary has stayed the same for the past two years can purchase the equivalent of only 92.2% of what they could two years ago.
Netanyahu and Smotrich’s plan does not seek to lower prices overall. Rather, it aims to freeze some utility prices and slightly reduce some taxes. In order to help people struggling with rising costs, the ministers ought to focus on the other side of the equation – wages. There are several methods on the cabinet table for increasing wages.
A hyped-up plan with disappointing projected results
The day after Smotrich and Netanyahu presented their plan to fight inflation, economists at Bank Hapoalim, one of Israel’s largest banks, updated their inflation forecast for the coming months and the year as a whole. In their assessment, the measures presented will reduce the increase in the CPI by one-tenth of a percentage point in January (0 percent instead of 0.1%) and February (0.1% instead of 0.2%). In the coming year as a whole, the CPI will decline to 2.7%, where previous forecasts had it at 3%. The difference amounts to no more than dozens of shekels per household per month.
Netanyahu understands economics. He presumably understands that the phrase “freezing the drivers of inflation,” which he’s using to refer to the plan, is an exaggeration. Inflation is a global phenomenon, which has been first and foremost driven by disruptions in the supply chain and increases in energy prices resulting from the coronavirus crisis and the war in Ukraine. The good news is that in all major economies, inflation seems to have peaked and is beginning to decline. The bad news is that the prices are not going down, and that the proposed measures will not address the inflation that has already taken place.
Methods to balance the equation
In order to bring wages back into balance with prices, the government has three tools at its disposal.
The first and most significant of all is the framework agreements in the public sector, which would raise wages for government workers as well as the Israelis whose wages are tied to public sector wages through collective agreements. These agreements would have a direct and indirect impact on some 600,000 workers who have been suffering from wage erosion for four years, since the end of their previous wage agreement in 2019.
A rapid framework agreement that compensates for price increases, both those that have already happened and those that are projected, will provide the broadest response to the erosion of wages. Wages in the public sector are significant not only for civil service employees, local authorities, and government corporations, but also in determining wages in the economy as a whole. A significant salary agreement will also increase the public sector’s ability to recruit employees.
There are also four extension orders on the table that would raise wages and improve working conditions for four disadvantaged groups of workers: caretakers, cleaning workers, caterers and construction workers. All together, the orders cover between tens and hundreds of thousands of workers. These extension orders are based on agreements signed by the Histadrut with the various unions during the previous government and are awaiting the signature of the new Minister of Economy, Nir Barkat.
The government can also act to raise the monthly minimum wage beyond the automatic increase of 272 shekels ($80) expected in April, which would bring the minimum wage to 5,572 shekels ($1,640). The Histadrut has called on the government to immediately raise the monthly minimum wage to 6,000 shekels ($1,760).
Addressing the high cost of living through wages
Netanyahu and Smotrich’s plan to freeze utility costs and other measures of that sort are small potatoes compared to the large burden Israelis are facing. A genuine solution has to rely on increasing wages. This should not be controversial, given that the Treasury has accumulated surplus tax revenues of tens of billions of shekels, and, for the first time in 35 years, a budget surplus of an additional 10 billion shekels (about $3 billion) that the government hasn’t even touched.
Addressing the high cost of living was at the center of Netanyahu’s election campaign. If he is to fulfill this promise, Netanyahu must take significant steps in order to bring real relief to those who have been dealing with rising prices and stagnant wages for the past two years.
This article was translated from Hebrew by Leah Schwartz.
