Israel at economic risk, can continue the war? – 2024-03-08 04:24:00

Israeli Prime Minister Benjamin Netanyahu hopes to pass an emergency war budget in parliament in the next few weeks. These included cash payments to settlers and construction of religious institutions. Allocations to the social sector may decrease to keep the country’s military budget intact. Israel’s military budget could double in 2024 compared to 2023.

A ceasefire is being negotiated. But Netanyahu has repeatedly made clear that any ceasefire deal would be temporary. If the cease-fire lasts or he doesn’t, there will still be political support for Israel’s military.

The biggest concern is that the war is costing more than expected. Israel’s economy shrank by one-fifth at an annualized rate between October and December compared with the previous three months. More than 750,000 left the labor market during the same period, which is one-sixth. Moreover, rating agency Moody’s downgraded Israel’s credit rating for the first time last month. For these reasons, the question is whether Israel can continue the war?

The main problem for Israel is the economy. At the time of the Hamas attacks inside Israel, the debt-to-GDP ratio was 60 percent in October, well below the average for rich countries. But between October and December, Israel spent $8 billion more than usual on its military, 2 percent of GDP. Not only the expenditure on the armed forces, but also accommodation for refugees, several furlough schemes and large sums of money for reservists. Israeli policymakers consider a debt ratio of 66 percent manageable. Although the Netanyahu administration is targeting a fiscal deficit of 6.6 percent of GDP, the debt-to-GDP ratio will increase further.

For the US and Japan, such debt is a breeze. But the opposite may be true for Israel. Because there is a danger of war spreading. In such a situation, a quarter of Israel’s income tax could be at risk.

Many are concerned that Netanyahu’s budget could be lavish. However, during such crisis the government can borrow to manage the situation. As Israel’s military spending remains high, a plan is needed to stabilize the debt.

Israel received 33 percent of GDP from revenues in 2022, slightly below the average of 34 percent among rich countries. Netanyahu’s budget may increase many things. Value Added Tax may rise to 18 percent. Health tax may increase by 0.15 percent based on income. Policymakers are concerned that raising corporate taxes could hurt the tech sector. Moreover, if the tax on households is increased, their expenditure may decrease.

Israel’s economy has been in crisis since the start of the war. In the meantime, the construction sector has almost come to a standstill. Farms lost labor. Companies associated with tourism are dying. 77 percent fewer tourists visited Jerusalem than a year ago.

Source: The Economist

MSM