The watchword: Fiscal discipline

The new government's economic policy will be to ask Stanley Fischer what to do.

Another Israeli election campaign has ended in which economic issues were pushed to the margins, even thought the local economy is at the start of a recession and the economic ground is burning under our feet. It is doubtful whether even a single voter took the economy and the parties' stances on economic matters into account.

However, the next government will serve for its first year or two in the shadow of the great economic crisis, of a recession, of a weakened financial system, and of growing unemployment. It is also possible that, at the same time, the government will run into clashes with the US administration, which will not add to the confidence of investors, Israeli or foreign.

All these things are not immediate worries. What preoccupies the parties is what will happen to the 2009 state budget, which has yet to be approved by the Knesset. Now that the lection is over, the party leaders can speak more freely about the economy and present their plans and demands more openly.

In fact, the coalition negotiations will also be negotiations on the budget for what is left of 2009. Every party that makes up the coalition will demand a signed promise from Benjamin Netanyahu and Tzipi Livni about certain matters with clear budgetary consequences.

If the demands of the ultra-orthodox cannot be squared with those of Israel Beiteinu, or if the demands of any of the potential coalition parties are at odds with the plans of whoever forms it, the government will have its weaknesses exposed even before it gets underway. The new government will have 45 days to pass the budget, and the task is likely to prove tough.

The answer to all these lies in the plan each candidate for the premiership has for dealing with the economic crisis, assuming they have such plans. One can assume that in the case of both Livni and Netanyahu, the main plan is to ask Governor of the Bank of Israel Stanley Fischer what to do. What they will hear is what the governor has been saying for weeks: fiscal expansion is possible only as a temporary measure; the non-bank credit market must be expanded; the financial system must be strengthened.

Fischer, no less than President Shimon Peres, will make clear to all concerned that Israel needs a functioning government, and quickly, which will raise the incentive to base the government on a partnership between the two largest parties, with another party or two joining.

The bottom line is that the economic policy of both parties that claim the premiership will be based on what is known as "preserving the budget". Outwardly, there will be talk of expanding the stimulus plan, but at the end of each declaration Livni or Netanyahu will swear fealty to "fiscal discipline".

The parties advocating fiscal expansion, Labor and Meretz, failed catastrophically at the polls. Even if the reason for that has nothing to do with their economic platforms, in the situation that has come about all they can do is snipe from the left at the economic policy of any coalition. The opposition will soon discover the temptation of waiting for the next election campaign, which the governing parties are liable to reach wounded and battered, after a severe recession, with every group and sector in Israeli society venting complaints and anger gains those in power.

Published by Globes [online], Israel business news - - on February 11, 2009

© Copyright of Globes Publisher Itonut (1983) Ltd. 2009

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