Political instability makes long-term planning difficult, but we can cope, they add
Political uncertainty will damage the economy, Yohanan Plesner, president of the Israel Democracy Institute (IDI), said on Tuesday, a day after Prime Minister Naftali Bennett decided to dissolve the Knesset and schedule the fifth national election in three and a half years.
When ministers are replaced and governments fall, Plesner said, “it’s almost impossible to make [business] decisions, especially not decisions that take long-term planning into account and demand persistence in their implementation. This is true of most of the foundational challenges facing the economy.”
At best, he continued, “Israel will need to wait at least another six months until a stable government is formed. A less positive outcome would be that we find ourselves sliding into a sixth, or even a seventh, election.”
Plesner spoke at the IDI’s Eli Hurvitz Conference on Economics and Society being held this week in Jerusalem.
Ram Blinkov, director-general of the Finance Ministry, told The Media Line that even if another round of elections is inconvenient for the economy, it is a price of democracy.
“Elections mean uncertainty, which is very bad for the economy, and we don’t like it. But this is a democracy, and we need to deal with it,” he said.
Dr. Ron Tomer, president of the Manufacturers Association of Israel, told The Media Line that for the businessmen and the manufacturers in the country, this political instability makes it impossible to predict the future.
The Bennett government made an important change; it actually passed a state budget after two and a half years without one, said Tomer. “But we need continuity, without continuity we cannot do long-term planning,” he added.
In addition, every round of elections represents a big risk for industry, he explained.
For us, he continued, “running now to elections is a big problem and we’re very afraid that with every election there could be some kind of populist decisions.”
“We are really frustrated by this. I’ve been in my role for two and a half years. Finishing my third year by the end of this year, I’m going to serve under four different governments; it’s impossible,” Tomer said.
Finance Minister Avigdor Liberman, addressing the conference, said Israel is making progress in countering the soaring cost of living. He added, however, that the government needed more time to complete the job.
“We are heading in the right direction in terms of contending with the rising prices. But to implement plans you must have at least two years of stability. The housing market doesn’t change in a month or two,” he said.
“Within a year we were able to halt the rising cost of housing and stabilize prices, and if we would have continued for another year we would have succeeded in lowering costs,” Liberman said.
Prof. Michel Strawczynski, director of research at the Bank of Israel, told The Media Line the economy could function during such times of political instability.
“Israel knows how to work when we don’t have a government. We already had four elections, and this will be the fifth, and in fact, we have very clear rules in the budget,” he said.
The current state budget will continue in force until the end of 2022, the election will probably be held at the end of October, and this means we will start 2023 without a budget, explained Strawczynski.
“There is an automatic rule that helps the government to work [in such a situation], and we have already shown in the past that it’s not a major problem,” he said, adding that it is still important to approve a 2023 budget as soon as possible.
When no state budget is in place, the law authorizes the government to expend a sum equivalent to 1/12th of the previous year’s budget each month, adjusted for inflation. However, changing priorities and signing new contracts is difficult.
Strawczynski added that the fact we didn’t have a budget for so long was problematic in many senses. “For example, there were no priorities. The new government started to make some changes, but I think that the main problem is that it didn’t have enough time to start reforms,” he said.
Blinkov said that despite the political instability, the Finance Ministry has “been able to support our industries through budgets from the government and by pushing for an incentive for investment.
“You have to remember that we just passed through two years of COVID, we have the big world economic crisis, we have this terrible war in Ukraine, we have the shipping and the energy crises. There are so many threats; we need to make all possible efforts to be strong and to pass through this era,” Blinkov said.
“I’m not sure that political instability is a great help,” he continued.
Blinkov described rising prices as the most significant challenge for the economy. “We are facing significant inflation after many years of non-inflation, even though in comparison to America and other places it’s lower here. But we are concerned about it,” he said.
Strawczynski added, “We were experiencing relatively rapid growth and all of a sudden, the challenge of inflation became the most important one. We started to raise the [Bank of Israel’s key] interest rate and are now at a level of 0.75%.”
Blinkov said the rising production from Israel’s offshore natural gas reservoirs helps to counter the rising prices. It also makes Israel almost independent in the energy sphere, he added.
“This is one of the reasons that inflation is much lower here. We’re not affected by the price increases for energy in Europe and America,” he noted.
Strawczynski said Israeli authorities are taking measures to deal with the effects of the increasing gas production, which is a positive phenomenon but also creates issues that need to be addressed.
We have raised a lot of revenue from taxing the gas and “dealt with that by forming a sovereign wealth fund,” he said.
That will help to counteract the possible bad effects, such as accumulating a great deal of foreign currency that leads to an excessive rise in the value of the shekel, making Israeli exports expensive and uncompetitive, Strawczynski said, reiterating, however, that the gas revenue is nevertheless “a very positive phenomenon.”