Elections deepen economic and fiscal gloom

Avi Temkin

Benjamin Netanyahu thinks recession and stagnation won't hurt him in the ballot box.

If there were any hope at all that 2015 would be a turnaround year for the Israeli economy, it was lost in the conversation between Prime Minister Benjamin Netanyahu and Minister of Finance Yair Lapid, in which the coalition effectively collapsed. Israel is having elections at the end of the first quarter of 2015, and the Israeli economy is entering months of uncertainty and stagnation.

The first area in which this uncertainty and stagnation will be felt is in the fiscal realm. 2015 will be another year in which the government will be run according to the rules of a 1/12 budget, meaning on the basis of the budget approved for 2014, divided by 12 for each month. This means that all the one-time supplements approved in 2014, all the money promised for this year, every amount that deviated from the approved budget, no longer exists. In effect, there is no fiscal policy, and every budget supplement will depend on the quality of the political maneuvering in the government and the Knesset Finance Committee. In simple language, we are entering not only an election campaign, but also the season of political opportunism. This situation will last as long as there is no new approved budget, i.e. until the end of the first half of 2015, at best. The next government, whatever its composition, will have to cope with a rather difficult budget legacy from the very outset, in its first month of existence.

From an economic perspective, the absence of a fiscal policy puts the responsibility for the safety of the economy on the Bank of Israel's shoulders, even if it lacks the tools to do the job. At other times, in other conditions, a central bank could use the interest rate tool to try to regulate activity, but that is not the case this time. Actually, now that the interest rate is already negligible, the monetary tools at the central bank's disposal now are very limited, unless it decides to implement the plans for quantitative easing.

Nevertheless, there is one bright spot: the devaluation in the shekel exchange rate in recent months. The weakening of the local currency is a combined result of the currency ratios in the global market, the lowering of the domestic interest rate, and political and security uncertainty. Eventually, a weaker shekel should help the exporters, although they will have to deal with a prolonged slowdown in the overseas industrialized markets.

Even if exports improve in the coming months, however, the general picture of the Israeli economy remains difficult. The public is uneasy, and pessimism is still a dominant factor in planning by households, although it should be kept in mind that the atmosphere of a slowdown is being felt far more in the outlying areas than in the central region (remember that behind the low growth rate of just over 2% lie very different situations in families, cities, regions, and various sectors). This means that growth in private consumption is projected to be quite small. The feeling that the cost of living is climbing is still evident, even if the Central Bureau of Statistics' figures show that inflation is negligible, or even negative.

Usually, prime ministers avoid elections under these conditions, because the risk that the economic unease will be translated into results at the ballot box is too great. In Israel, however, everything works differently. Netanyahu thinks he can cope with the recession, the unease, and stagnation.

Published by Globes [online], Israel business news - www.globes-online.com - on December 1, 2014

© Copyright of Globes Publisher Itonut (1983) Ltd. 2014

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