LDN - Business

Election turmoil plunges Israel into budget crisis

[November 21, 2019] By Ari Rabinovitch and Tova Cohen

JERUSALEM (Reuters) - With the prospect of a third election in Israel in less than a year, it will be well into 2020 before a new budget is passed, triggering months of cutbacks that will weigh on economic growth.

The Israeli economy has so far weathered two inconclusive ballots and a year of successive caretaker governments that were restricted from making any big decisions, from tax reforms to court appointments.

But it cannot escape the impact of no budget. Government ministries will automatically revert to their 2019 monthly allocations without an increase, making it harder to commission new roads, pay contractors and cover a growing deficit.

"Coping with it will not only affect government offices, but also the entire economy," the accountant general told a concerned parliamentary finance committee this week.

He offered the gloomy outlook as it became clear that neither Prime Minister Benjamin Netanyahu nor his rival, Benny Gantz, had enough support in parliament to form a government.

With both politicians coming up short, there now begins a 21-day period in which Israeli lawmakers can nominate any one of the Knesset's 120 lawmakers to try and establish a coalition.

If that fails too, an election is triggered within 90 days, raising the prospect for a weary electorate of going back to the polls after votes in April and September.

"There is absolute chaos in all the government ministries. That's what happens when you don't have a budget. And if they really do announce elections - it becomes a nightmare," said Amir Fuchs, a legal expert at the Israel Democracy Institute.

Defence contractors are already seeing government payments being frozen, according to an industry source. New road and rail projects, critical to ease traffic congestion, are expected to be put on hold.

"Purchases by ministries will all slow and some will even come to a halt," said Jonathan Katz, Leader Capital Markets' chief economist.

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Israeli Prime Minister Benjamin Netanyahu looks on as he arrives to review an honor guard with his Ethiopian counterpart Abiy Ahmed during their meeting in Jerusalem September 1, 2019. REUTERS/Ronen Zvulun/

LOST OPPORTUNITIES

Uncertainty aside, the shekel remains one of the strongest currencies in the world and economic growth was a robust 4.1% in the third quarter, initial estimates showed this week. But risks have grown over the past year.

Israel's budget deficit is projected to swell to close to 4% in 2019 from 2.9% in 2018, and new taxes and spending cuts are needed to rein it in before it impacts the country's credit rating.

Government officials promised to boost investments in public transport and competition in the workforce to keep steam in the economy, but most plans have come to a standstill.

"The main issue is that of lost opportunities. More specifically, the opportunity to make much needed structural changes in the economy," said Bank Leumi chief economist Gil Bufman.

The OECD on Thursday cut its economic growth forecast for Israel to 2.9% in 2020, from a previous estimate of 3.3%, and forecast a similar rate in 2021.

It blamed the global slowdown, but also noted that "intensifying structural reforms...is crucial to lower the large social disparities and boost productivity".

The OECD also called for tax reform to increase revenue, something impossible without a government in place.

The Bank of Israel is expected to cut its key interest rate next week for the first time since 2015, with most economists polled by Reuters citing the global slowdown and an over-appreciation in the shekel.

(Additional reporting by Steven Scheer and Dan Williams; Editing by Angus MacSwan)

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