Israel’s Prime Minister, Netanyahu, took a chance on going to the polls nearly a year early.

Never mind the external challenges – Iran, Syria, peace process – the economy was closing in. By the end of the campaign, everyone knew that the average voter was about to face a wave of price hikes: water, gas, electricity to name just a few. Further, during the campaign, government supporters stopped trying to pretend that taxes would not rise (again) to cover a nearly US$4 billion extra and unplanned fiscal deficit.

So as the politicians spend the customary dithering time trying to form a coalition government with people they had castigated days previously on the election platforms, what is going to happen to the economy?

On the positive side, there is still much to shout about. In December 2012, the economy kept moving ahead, this time by 0.1%. This stat is in line with the estimate of nearly 3%, predicted for the whole of 2013. Similarly, unemployment has crept up to 7%, which is relatively low compared to many in the Mediterranean zone.

FDI remains fairly resilient. For example, in an extensive analysis in the Hebrew press with Hamilton Lane, it is evident that this private equity group intends to extend its 6 year position in the Holy Land. And while there may be a slackening in the number of buy outs, even during 2012 US$5.5 billion was invested in Israeli high tech by outside positions. No wonder that the Israeli pavilions are so prominent at the Las Vegas gadget show last month and the upcoming mobile / app bonanza in Barcelona.

That said, the country faces critical structural issues that are continually being brushed under the carpet. Delaying serious change will only make the inevitable more painful. Specifically: –

1. The budget deficit needs to be reduced, immediately. That means higher taxes for all. And that also means the defence establishment has to take a hit.
2. Israel’s sea ports, specifically Ashdod, are over-staffed. In parallel, the average workers receive wages that are simply scandalous. These facts add up to an unecessary strain on the taxpayer. And similar observations can be made about the Electricity Corporation, which is unlikely to be privatised in the near future, due to a strong workers committee.
3. The farming sector is set up to protect the producer at the expense of the consumer. For example, it is extremely difficult to import fruit, even when the subject matter is not in season. Again, this is the fault of a government not wishing to challenge strong vested interests.
4. And finally, there is the high tech arena, the back bone of Israel’s economic success for over a decade. As the country’s Chief Scientist has just warned, Israel is failing to find ways to maintain its competitive advantage in the field of “innovation”. This needs a full and immediate rethink at the highest levels of government.

I could also mention the need to extend immediately land reforms that the previous administration introduced with more fanfare than substance. And there is the disgraceful wastage over positions as directors on the board of government jobs. A recent survey showed that 400 postings – each carrying an expense to the same taxpayer – had to be fulfilled, but life was carrying as normal. etc etc.

Israel’s governement has a strong economic base to correct these anomalies. Delay for too long or become sucked down by coalition politics, and then Israel’s ruling elite will soon find themselves abandoning the economic achievments of the past two decades. Now that really will hurt.