Israeli Coalition ‘Partners’ Clash over Budget, Threaten Elections

Economists on both sides of argument explain why country could be headed for impasse

To no one’s real surprise, Israel’s brand new Likud-Blue and White “unity government” is quickly turning into anything but.

The tensions and disagreements between the two rival parties, be it on the issue of Prime Minister Binyamin Netanyahu’s corruption trial, the handling of the coronavirus crisis or the question of West Bank annexations, have been apparent since day one and have only grown since. But if there is one topic that poses an immediate threat more than any other, it is the budget.

While Netanyahu, head of the right-wing Likud party, wishes to pass a so-called emergency budget that will last until the end of 2020, Alternate Prime Minister and Defense Minister Benny Gantz, leader of the centrist Blue and White, is demanding a two-year budget that will remain in effect through the end of 2021, as had been agreed by the parties when they signed their coalition pact.

While Gantz insists that he is seeking long-term stability for a crashing economy, political analysts believe it is more out of fears that Netanyahu will exploit the next round of budget talks to dismantle the government and seek re-election before relinquishing the prime ministerial chair to Gantz.

The discord heated up this week after both made it clear they would not back down, even at the price of yet another election.

The Media Line spoke with two seasoned Israeli economists, both with extensive experience in public budgetary policy, about the upsides of each approach, the potential fallout of a prolonged budget fight and the necessary measures needed to salvage the Israeli economy.

“The first time [Israel] implemented a biennial budget was when we did it back in 2009,” explains Yarom Ariav, who served as director-general of the Finance Ministry at the beginning of Netanyahu’s more than decade-long run as prime minister.

“It was a very similar situation in that there was a financial crisis… and we prepared a budget for the following year and a half,” he said.

“It was marketed as something that would bring stability and certainty to the markets in the wake of the global [financial] crisis,” he continued.

“Pretty soon, people [in the ministry] fell in love with it and did it over and over again, saying that even in ‘normal’ times, there’s an advantage to passing the budget every two years because it affords the government a wider berth for planning and executing policy,” he said.

Ariav personally disagrees with this premise and believes that a yearly budget is the right course of action in ordinary times. But the current crisis, in his opinion, calls for something similar to the measures he put forth in his days as director-general.

“I think the answer in this case, from a professional standpoint, is clear: We need a biennial budget,” he said. “It’s actually just for five [fiscal] quarters [until the end of 2021], not eight…. It’s ridiculous to pass two bills [on the budget] one after the other in such a short time span. The business sector desperately needs some long-term stability.”

To bolster their claims that two separate budgets would be better, Likud lawmakers point to a near-unanimous endorsement for the proposal from Finance Ministry officials. Ariav, however, warns that the motivations might not be based solely on professional criteria.

“I’m not sure how much of that is the result of political considerations,” he said.

As to Netanyahu’s argument that another round of budget deliberations three or four months from now would enable the government to adjust its handling of the financial crisis as it evolves, Ariav isn’t buying.

“It has no basis in reality,” he stated. “We already know today where we’re headed in 2021. And even if things change, for better or worse, there are built-in mechanisms by which you can adjust the budget.”

It has no basis in reality. We already know today where we’re headed in 2021. And even if things change, for better or worse, there are built-in mechanisms by which you can adjust the budget

Prof. Eytan Sheshinski, a former chair of the Israeli Economic Association and a visiting professor at prestigious universities like Princeton and Stanford, disagrees.

“I believe there’s so much uncertainty that a one-year budget is inevitable,” he told The Media Line. “It seems like the foundation required [for a two-year budget] doesn’t currently exist. There are just not enough statistics at this point.”

With a new round of restrictions being imposed this week to combat the spike in coronavirus infections, Israel’s business sector seems on the brink of collapse. Though he admits that the 2009 financial crisis had vastly different causes and characteristics, Ariav draws on his experience from those days to outline the general tools needed to turn the economy around.

“First, you must have a leadership that projects confidence – in the Finance Ministry, in the Central Bank and in the Prime Minister’s Office,” he said.

“Next, you need a correct analysis of the facts so that the decision-makers have the relevant data at hand. That is lacking right now,” he adds, pointing to the disagreements that abound even about basic figures like unemployment.

“Finally,” he stated, “you must have a set of tools that are appropriate to the specific situation you’re in and that you can wield as the need arises.”

Sheshinski, who in the past chaired several special economic committees advising Israeli lawmakers, sees a silver lining in the current situation.

“This crisis might actually be an opportunity,” he says, “to fix structural problems that have been there for years – pensions, public health and other areas that have been neglected for decades.”

This crisis might actually be an opportunity to fix structural problems that have been there for years – pensions, public health and other areas that have been neglected for decades