Economic Cost of Israel’s Election Nightmare Is Adding Up

(Bloomberg) -- Israel’s incessant election cycle has created a problem for Avraham Yustman, a community leader in Jerusalem whose non-profit distributes vouchers for professional training to hundreds of ultra-Orthodox Jews.

With the country headed to its third ballot in a year, and lacking a permanent cabinet and budget, about half of his Kemach Foundation’s operations are at risk, including a program that receives up to 10 million shekels ($2.9 million) per year from the government to bring ultra-Orthodox into the workforce.

“There are many programs like this that we want to advance that are stuck,” said Yustman, vice president of Kemach. “We have no ability at the moment to plan our budget for next year.”

Political maneuvering for Israeli leaders is increasingly taking priority over long-term planning as a period of electoral paralysis pushes off crucial investments and reforms. Central bank Governor Amir Yaron warned on Tuesday that without changes in government programs, the budget deficit may reach a “dangerous” level of more than 4.5% of gross domestic product in 2021 -- compared with this year’s target of 2.9% -- with national debt surging to 75% of GDP by 2025.

The International Monetary Fund has already lowered its forecasts for Israel’s economy, with real GDP growth now projected at 3.1% this year and next, down from its earlier prediction of 3.3% for both years. The Bank of Israel’s research staff sees growth even weaker in 2020.

The national debt load went up last year for the first time in nearly a decade while the budget deficit widened, with the government now unable to increase taxes or cut spending. The IMF has warned that could act as a constraint on the government’s “ability to use fiscal policy to cushion shocks to the economy.”

Two rounds of national elections this year ended in deadlock and right-wing Prime Minister Benjamin Netanyahu, as well as his rival, former military chief Benny Gantz, have both failed to form coalition governments. There’s no 2020 budget since a new government is needed before major decisions can be made.

Israeli central bankers are already concerned that operating on a continuance budget for an extended period could have “a contractionary effect.” Finance Ministry Accountant General Rony Hizkiyahu told parliament that the delay would hit markets.

Longer View

Israel’s prospects ride, in part, on whether it succeeds in bringing the ultra-Orthodox, the country’s fastest-growing demographic, into the workforce. Productivity and workforce participation have been dragged down by some segments of the population. And the country needs to upgrade its health and transportation infrastructure.

The economy might cope with the more immediate issues, but the challenge is to make progress on what could hold it back over the long term, according to Anthony De Lannoy, Israel’s executive board representative at the IMF. “You have a couple of structural problems in the Israeli economy, and they’re very much linked to demographics.”

It doesn’t help that another election slated for early March is expected to cost the government about 534 million shekels. For now, though, ratings agencies remain confident that Israel will eventually form a government and bridge the fiscal gap.

Economic Fallout

Rather than focus on the cost inflicted by politics, the Finance Ministry’s chief economist Shira Greenberg is pointing to warning signs in the labor market, including slower job creation.

“There is a slowdown that is not connected to the political situation,” Greenberg said in an interview last Thursday. “The economy will not pay a price now because of the political instability.”

The paralysis also hasn’t affected the shekel, one of this year’s top performers globally, thanks to factors that not even a year of dysfunction could undo: Israel is continuing to run a current-account surplus, foreign investment is flowing in, and natural gas production is on the rise. Still, Israel’s currency is trading near its weakest in more than a month, cutting its gain against the dollar this year to less than 7%.

“Markets are blasé, and I guess they’re assuming ratings agencies will also be forgiving,” said Jonathan Katz, chief economist for Leader Capital Markets Ltd.

With elections due on March 2, there won’t be a new budget at least before the middle of the year. Until then, the government will operate on monthly extensions of the current one.

“The economic impact is significant, economic reforms are stuck,” Orit Farkash-Hacohen, a lawmaker who represents Gantz’s Blue and White bloc on the finance committee, said in an interview.

To contact the reporter on this story: Ivan Levingston in Tel Aviv at ilevingston@bloomberg.net

To contact the editors responsible for this story: Lin Noueihed at lnoueihed@bloomberg.net, Paul Abelsky

©2019 Bloomberg L.P.