Prime Minister Benjamin Netanyahu faces a challenge this month as his coalition of national and religious parties seeks approval for a spending package that the government's budget unit claims will hinder growth. Legislators must approve the budgets for 2023 and 2024 by the end of May to avoid elections. Netanyahu's coalition, which controls 64 out of 120 seats in the Knesset, appears to be moving towards passing the budget. However, economists say the spending plans could obstruct the government's financial objectives, while the Ministry of Finance itself warns that it may slow growth.
Israelis are already suffering from rising living costs, and the economy has been affected by the judicial amendments proposed by the government, which are currently stalled and have led to a political crisis, hampered investments, and reduced growth prospects. Three economists indicated that the government targets a deficit of 1% of GDP in 2023 and 0.8% in 2024, but this could double or triple, which may increase bond yields. Victor Behar, chief economist at Bank Hapoalim, stated that "the forecasts are overly optimistic."
An official in Netanyahu's office downplayed the concerns, saying, "The Prime Minister and the Finance Minister intend to pass a responsible budget in the coming weeks that serves all Israelis. The budget will enhance stability and growth." The government is under pressure from unprecedented public protests over the months and Western discontent with its actions, in addition to declining popularity. It allocated 13.7 billion shekels ($3.8 billion) from "coalition funds" to finance political deals with hardline Jewish parties that support settlers and are crucial to Netanyahu's coalition.
The funds include additional hundreds of millions of shekels to support allowances and schools of ultra-Orthodox groups that reduce the study of non-religious subjects such as mathematics and English while focusing on the Bible and living off government aid. Ultra-Orthodox Jews, or Haredim, make up only 13% of Israel's population but are a rapidly growing segment, with nearly half of their men unemployed. Many choose not to work, and those who seek work are often unqualified for employment.
The Finance Ministry's budget division, in an unusual analysis on Thursday, stated that the government would reverse the economic incentives to encourage Haredim to join the labor market by increasing spending on religious schools, food vouchers, and wages. The analysis indicated that these measures would negatively affect growth in the short and medium term and ultimately harm "the productivity, growth, and quality of life for all Israelis."
Hardline Deputy Itzchak Bendros told Kan Radio that "Finance officials do not understand the Haredim... There will be no Israeli society, nor Jewish society, if there are no people who dedicate their lives to studying the Torah." Finance Minister Bezalel Smotrich said the funds would address the injustices faced by Haredim over the years, pointing to the overcrowding of their children often in neglected classrooms. He stated that further steps would be taken to help Haredim find jobs.
He added, "There is no crisis here," referring to a financial surplus so far in 2023 and a responsible budget. However, Michael Eisenberg of the Israeli Aleph Investment Company said that additional spending would fuel inflation, hinder growth, and "cost both Israel and the Haredi community dearly."
Government figures already predict a decline in Israeli economic growth to about 2.7% in 2023 from 6.5% in 2022, falling from a previous expectation of 3% in January. S&P Global Ratings expects growth of only 1.5% in 2023, stating that it could slow further due to political uncertainty regarding the government's stalled campaign to limit the Supreme Court's role in judicial appointments.
Since returning to office in December, Netanyahu dismissed his defense minister due to opposition to the judicial amendments. He halted their progress to allow for talks with the opposition and faced a boycott from far-right Minister Itamar Ben Gvir during Knesset voting. The proposed judicial reforms have led to decreased foreign investment and capital flight. The shekel has weakened, and Moody's has downgraded its rating for Israel to stable.
So far, the desired outcomes from negotiations regarding the judicial amendments aimed at achieving broad consensus that would prevent further damage have not materialized. Some fear that the budget may not adequately consider the severe slowdown in growth, potentially leading to greater harm. Opposition leader Yair Lapid stated, "Netanyahu sold Israel's economy and our children's future for the sake of remaining in power."
