World

A new election puts Israel’s efforts to reduce the cost of living on hold


Band Steven Scheer

JERUSALEM, June 23 (Reuters) – Israel’s economy is expected to be resilient through a new election cycle, but households will suffer as reforms to reduce the cost of living are likely to be put on hold and state spending reduced until a 2023 budget is released. approved.

Prime Minister Naftali Bennett decided this week to dissolve parliament and call Israel’s fifth elections in less than four years after infighting rendered the ruling coalition untenable. The poll is expected to take place between late September and early November – meaning months of political paralysis.

The dollar-shekel ILS= the rate has barely budged so far, reflecting basic economic resilience in the face of now-familiar electoral upheavals.

Fixed capital investment and private spending are on the rise and exports should rebound after a lackluster start to the year.

“Additional political uncertainty is somewhat negative for markets, although Israel unfortunately has had a lot of experience with this scenario,” said Jonathan Katz, chief economist at Leader Capital Markets. “The main drawback is the lack of tax reforms and policies.”

Foreign Minister Yair Lapid will lead a caretaker government once an election date is decided next week. After a vote, it usually takes weeks for a coalition to be formed.

“We are now assuming a more limited government role in the policy space with respect to inflation this year. We…believe the Bank of Israel will be encouraged to take stronger action against inflation,” he said. Jessica Murray, economist at JP Morgan.

Inflation hit an 11-year high of 4.1%, which is lower than most Western countries, and the central bank has started raising interest rates, but public anger is growing over what the Israelis see as a sharp rise in the prices of goods and services.

The government had responded with reforms planned to boost housing starts and extend a rebate program aimed at curbing rapidly rising house prices as demand continues to outstrip supply. He also announced his intention to open the food and agricultural sector to more imports rather than protecting local industry. However, these reforms and measures have not yet received final parliamentary approval and will now be suspended until at least next year.

Public sector wage deals will also likely be delayed, as will a move to raise the minimum wage and spending on public sector infrastructure projects.

Citi economist Michel Nies said putting the projects on hold could affect Israel’s growth potential and longer-term fiscal and monetary policies.

The vote on the 2023 budget, which was expected for November, has probably been postponed until a new government is formed.

“The collapse of the ruling coalition has considerably

increased medium-term fiscal risks in Israel,” said Deutsche Bank economist Fatih Akcelik.

BALANCED BUDGET

The economy is however supported by the improvement in public finances thanks to the increase in tax receipts this year, which enabled the government to balance its budget in May.

“The fiscal stance is one of consolidation and that will continue through the election period and probably into next year,” Murray said.

Israel’s economy has rebounded strongly from the COVID-19 crisis, growing 8.2% in 2021 and projections are for 5% growth this year and 4% in 2023.

“The strong improvement in Israel’s balance of payments has reduced the sensitivity of the Israeli economy to political developments in the region,” said Goldman Sachs economist Tadas Gedminas.

Bank of Israel Governor Amir Yaron said Tuesday that the country’s institutional system allows the economy to function properly during election campaigns.

“The Israeli economy has proven to have an impressive ability to grow and prosper even under conditions of political and other uncertainty,” he said.

(Reporting by Steven Scheer Editing by Dan Williams and Susan Fenton)

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