The Ministry of Finance does not at this stage have any firm plan for encouraging economic growth. The director general of the ministry, Shai Babad, commenting on the matter last week, placed hope in the renewal of the round table with the Histadrut (General Federation of Labor in Israel) and the Manufacturers Association, with familiar solutions being bandied about such as increasing the R&D budget of the Chief Scientist, and expanding aid to exporters through state guarantees.
The signs of economic recession come at an especially bad time as far as the Ministry of Finance is concerned. It is already coping with two difficult challenges in drafting the state budget: a very large fiscal hole in 2017 that will mean deep spending cuts, and the fact that it is a two-year budget, obliging the Ministry of Finance to be extra cautious over the second year, which again means restraint in routine spending. A downward revision of the growth forecast for 2016 will force the Ministry of Finance to adjust the tax revenues forecast for 2016 and 2017 accordingly, making the fiscal hole even bigger. As if that were not enough, the economic slowdown limits the tools available to the ministry to close the hole, because raising taxes at a time like this will only worsen the slowdown and could tip the economy into a deep recession.
As reported in the past few days, the Budgets Division in the Ministry of Finance is under pressure from the prime minister to allocate billions to stimulating growth, even at the expense of some increase in the deficit target. There are those in the Ministry of Finance who cast doubt on the worthwhileness of such spending, arguing that its contribution to growth will not be felt in 2017, or even in 2018. The governor of the Bank of Israel has also warned in recent discussion against irresponsible expansion of state spending.
The Ministry of Finance believes that, unlike in the case of the acceleration program introduced in 2008, the source of the problem this time is not a global slowdown but local weakness in the economy, arising from, among other things, chronic problems such as low productivity and a high structural deficit. Solving these problems mainly requires long-term reforms and political determination.
Against this background, the question whether the prime minister will be able to exploit the broadening of the coalition to instigate significant structural changes, even if their contribution to growth will be felt mainly in the medium-to-long term, becomes more acute.
Published by Globes [online], Israel business news - www.globes-online.com - on May 30, 2016
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