Israel’s third general election within 12 months will take place on March 2nd. Everyone knows that political uncertainty is rarely good for a sophisticated economy. So how has the country managed to ride this wave of political intrigue?
It would seem that the Israeli economy grew at a rate of 3.3% in 2019, pretty good compared to other countries. And as for trade, at a time when China and the USA are threatening global instability: –
Figures for Israel’s trade and capital flow show an increase in the surplus, which supports further strengthening of the shekel against foreign currencies. Israel had a $9.8 billion trade surplus in 2019, compared with a $4 billion surplus in 2018. The balance of payments current account had a $14.8 billion surplus in 2019, compared with a $9.5 billion surplus in 2018.
Incoming tourism increased yet again in 2019, this time by 10%. Start ups raised a record US$350 million in December 2019 alone. And global companies like Tesla continue to set up offices in the Holy Land.
So where is the proverbial “but”?
Let’s look at those start ups. “5,313 new startups were founded in Israel between 2011 and 2018, but 2,387, or 45%, closed or froze their operations by 2018. In total, 4,363 startup companies were active in Israel in 2018, a 6% drop from 2017”. Hmmm.
Now let’s consider the budget deficit, which the government has sworn blindly for over a year is under control. The gap has already mushroomed to nearly 4.0% of GDP, way above all targets. New taxation is almost a given, when a government if eventually formed in the early summer.
And this budgetary hole is rarely a good sign, just when unemployment rates are beginning to turn upwards, admittedly from a low figure of less than 4%. In other words, the glory of numbers showing a strong economy is really not that genuine.
Roughly 18 months ago, the then governor of the Bank of Israel, Carmit Flug, took the hint and decided not to seek re-election. She had advocated that the fiscal policy of the Minister of Finance was irresponsible. She bitterly opposed the moves to reduce taxes. However, she was to lose the battle.
Is it any wonder that the head of Israel’s Tax Authority is currently looking for ways to raise taxes? First up on the list is the imposition of VAT on fruit and vegetables, a direct hit on the poorer sections of society. However, this decision will not be made until after March 2nd, thus protecting the government’s core base voting community.