The Israeli economy has been struggling with a growing budget deficit during the last two years, while the political system has recently reached a deadlock, following two close election cycles. However, analysts suggest that a possible solution to the budget crisis may be found in the lack of a fully functioning government.
The government budget deficit widened to 2.9% of the GDP in 2018, in line with the budget target, from 1.9% in 2017. The deficit is forecasted to expand to 3.6% of the GDP in 2019. Government debt/GDP ratio increased moderately in 2018, to 61%, ending a long downward trend from 75.0% in 2007 and 95.0% in 2003.
The growing budget deficit stems from rising government spending during Finance Minister Moshe Kahlon’s five-year-long term, in which he launched several social programs. The government’s budget grew from NIS 360 billion in 2017 to NIS 397 billion by 2019.
The increased spending did not coincide with increased government income, thus leading to a rapidly growing deficit.
To reverse the current trend, a new government would have to make significant spending cuts and possibly raise taxes to balance the books. However, during the last two election campaigns, the leading candidates made promises to do the exact opposite, introducing new expensive social programs and promising not to raise taxes.
These campaign promises, which would likely exacerbate the deficit problem, have not yet had a chance to come to fruition, as no government has had the opportunity to see them through.
In the lack of a government to pass a new budget in the Knesset, Israeli law dictates that every month, the budget will equal 1/12 of the previous year’s budget. Such a budget would curb the spending growth in such a way that the deficit would shrink significantly.
According to Tom Kregenbild, a financial analyst, the cost of consecutive election cycles would be significantly lower than the benefit associated with curbing the spending.
“Even though an election round in Israel is expensive, estimated at NIS 500 Million, three election cycles a year totaling NIS 1.5 billion would still not outweigh the NIS 20 billion annual savings from curbing government spending,” he explained.
There are, however, other economic risk factors that may affect the potential outcome of a no-government scenario, primarily the lack of stability that would likely impact Israel’s credit rating in the long run.