Prime Minister Benjamin Netanyahu and Finance Minister Betzalel Smotrich made a joint announcement two weeks ago ahead of the upcoming state budget. The announcement expressed ambiguity regarding the fulfillment of coalition agreements and promises made in their election campaign, along with deliberate determination to implement a budgetary restraint. Simply put, Smotrich and Netanyahu told the public that the government does not intend to increase its spending in the upcoming state budget. The price for the citizens of Israel, and in the long term, for the Israeli economy may be heavy.
Despite the increasing cost of living, which is reflected in price increases and mortgage repayments, and despite the dismal state of public services in Israel which suffer from insufficient budgeting, Netanyahu and Smotrich signal that they will continue the policy of a tight fist that was adopted by the previous government led by Bennett, Lapid and Lieberman
The spirit of the matter was made clear at the very beginning of the announcement: "The Prime Minister and the Minister of Finance agreed on the hedging of the coalition agreements and the intention to maintain a responsible and restrained fiscal policy.”
A restrained fiscal policy, by definition, will have difficulty meeting the expenses associated with the coalition agreements, as well as Netanyahu's election promises, which seem to have been forgotten since millions of citizens went to the polls: free education for ages 0-3, agricultural subsidies and the freezing of property taxes and water and electricity prices. Apparently, the vague term “hedging” will subject the implementation of the measures to the restrained budget framework.
There is room for debate about some of the election promises and coalition agreements, but the need to expand public investment in Israel is clear. Before the OECD data from 2019, civil public investment (without security) in Israel stands at 34.6% of GDP, compared to an average of 39.1% in all other OECD countries. In the European countries of the organization, which constitute a more relevant reference group for Israel as a result of the omission of developing countries, the rate of civil investment is 45.4%.
How does Israel’s investment in its citizens compare to other developed countries? The budget of the State of Israel in 2022 was 469 billion NIS. According to the Treasury's GDP forecast for 2022, Israel lacks 75 billion NIS to compare the rate of public investment from GDP to the OECD average, and approximately NIS 180 billion to compare it to the European OECD average.
The results of the budgetary abyss are visible from all sides. It can be seen in the low achievements of Israeli students compared to international student standard, in the shortage of doctors, which is expected to get worse since Israel has the highest proportion of elderly doctors (over the age of 55) of all OECD countries, and in the difficulty in recruiting and retaining police officers, teachers, and public servants from other professions. The immediate price is the well-being of the citizens of Israel, who suffer from inferior services, for which they are required to add a payment for private services if they can afford it. The long-term price is economic deterioration.
A strong economy cannot be maintained with weak public systems. A weak public education system will harm economic productivity and the rate of participation in the labor market. Women are the ones who are required to compensate for the lack of public service in the field of care, and as a result they are left behind in maximizing their employment potential. It's a huge financial waste. Netanyahu's election promise, free education from birth to age 3, as well as recruiting more kindergarten teachers and assistants, can contribute greatly in these contexts.
And what's more: the accelerated economic growth in the last two years was born of high public spending in the first year of the pandemic as well as a global investment wave that poured a lot of money into the high-tech industry. Today, that seems like a distant memory. This is what allowed Bennett and Lieberman to reduce the budget and leave the economy intact.
But with the view of the decline in global demand in mind, which is expected to harm the Israeli economy as well, it is necessary to reconsider fiscal economic policy. It may be that supporting the level of demand, for example through a significant increase in salaries in the public sector and an increase in the minimum wage, will help the Israeli economy survive the expected global recession. The wage increases are necessary anyway, and their cost to the government as an employer will be reduced by the tax collection they will generate.
In view of the particularly low ratio in Israel between public debt and GDP, 60.9%, it is possible and even necessary, to expand public investment. Smart public investment will reduce inequality, help integration into the labor market and strengthen the level of demand. Such support is required in 2023, which according to the forecasts, will be characterized by an economic slowdown and the curbing of inflation, which is already clearly observed around the world.
It seems that Netanyahu and Smotrich choose to announce a “responsible” economic policy that in practice removes responsibility from the citizens of the country, and also from the future of Israel's economy. It is better to strengthen the foundations of the economy today, at the price of a slight decrease in the debt-to-GDP ratio, than to wait for the shaky public services to collapse. Such a collapse will hurt the public and slow down growth, and thus the debt-to-product ratio will be damaged anyway, an injury that will be much more difficult to repair.
This article was translated to Hebrew by Nancye Kochen.
