The end of the war in the north and the start of the timetable for implementing UN resolutions are expected to initiate a new confrontation within days, this time on the economic front within Israel. Whereas until now, everyone was busy estimating the diplomatic damage, we will now have to pay the price of the war. This accounting has already begun and will last several months until the 2007 state budget is approved.
Israel’s economic captains have already more or less defined the price we will have to pay, but the key question is whether the current forecasts will bo borne out in reality. If they do, there’s a good chance that the economy can continue on its positive trend of recent years, subject, of course, to international developments.
It can already be said that the current war caught the Israeli economy in a good opening position, which improves the likelihood of it getting back on a positive track. Therefore, the price we will have to pay is mainly in alternatives - increasing the defense budget at the expense of education and welfare - without an absolute price, such as a tax hike.
In general, it can be said that, in the short and medium term, several variables will be measured, which will indicate whether the economic price will match expectations. The most important of these - loss to GDP, direct damage, and the change in the budget deficit - will probably determine whether the economy will be able to recover rapidly from the effects of the war. They will also serve as markers for the behavior of Israel’s financial markets.
The first variable is the loss to GDP, which could to be up to 1%, as estimated by Governor of the Bank of Israel Prof. Stanley Fischer, or even 1.5%, as estimated by other top economists. The loss to GDP, caused by the drop in tourism and private consumption for example, is expected to reduce Israel’s economic growth to 3.8-4.3% in 2006. This financial loss is estimated at NIS 6-9 billion.
The second variable is the change in the budget deficit as a result of the war. This factor includes lost tax revenues, currently estimated at NIS 2-4 billion, on one hand, and increased spending on the other. The increase in spending will likely be negated because the 2007 budget framework is not expected to be expanded, but its priorities changed. This will lead to difficult political battles.
The third variable is the direct war damage, including damage to private property, factories, and local authorities. The exact amount of this damage is very unclear at the moment. Some estimates assess this damage at NIS 8 billion, broken down as follows: direct damage to businesses - NIS 4 billion; direct damage to local authorities - NIS 2 billion; additional property damage - NIS 2 billion. This figure does not include peripheral damage. However, this damage could have a different effect on the GDP, because some of it will be later recognized as investment, which will actually increase GDP. It is therefore hard to know what the net extent of the damage is at this time.
It is rather difficult to add up these variable into a total cost, because they run along different accounting tracks, but they appear to be roughly the criteria economists will use. Final accounting of these hunches will only be available in a few months. Until then, we can only hope that the war will be solely on the economic front, and won’t revert to the “real” front, which could change the present working assumptions.
Published by Globes [online], Israel business news - www.globes.co.il - on August 15, 2006
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