If all goes as expected, Israel will have a new unity government next week. Incoming prime minister Naftali Bennett and incoming finance minister Avigdor Liberman will have to confront the myriad economic challenges awaiting them from day one, as the nation works to recover from the coronavirus pandemic and economic crisis.

Here’s a look at some of their most pressing challenges.

Passing a budget

A national budget is effectively the blueprint for assigning the government’s priorities and implementing its aspirations – and Israel hasn’t had one in two years.
The previous government fell in December, when MKs couldn’t agree on a budget for 2020 and 2021, and drafting a plan for 2021 and 2022 quickly is critical.
Bennett and Liberman have said they want to set a two-year budget within their first 100 days in office, so as to plan ahead and avoid the pain of doing this all again next year. Getting the eight parties of the “change” bloc to agree on how to allocate the state’s funds will be one of the first challenges for this very diverse coalition.
Economists in Israel and at the OECD are recommending that Israel and other Western countries continue at this point to embrace an expansive economic policy to encourage economic growth and recovery.
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Once the recovery is solidly entrenched, possibly in about a year from now, the governments will have to begin cutting down the massive budget deficits they have accumulated.
Israel ran a deficit of about 11% of GDP in 2020, its largest ever, and will probably fall behind another 6%-7% in 2021 and 5%-6% in 2022, before adopting a multiyear target of reducing the deficit that will include, among other things, slashing spending and likely raising taxes.
It will be interesting to see whether the incoming coalition partners are prepared to make those cuts. Many of the coalition agreements that have been signed include commitments to new projects that will add tens of billions of shekels to the state budget.
Among these are a socioeconomic plan for the Arab sector that could cost from NIS 5 billion to NIS 8b. per year; benefits for senior citizens and Holocaust survivors that are estimated to total more than NIS 2b.; and a basket of health benefits and childcare support programs that will cost billions more.
Economists are doubtful whether most of the items on the list will ever be implemented.

Unemployment

As Israel looks to heal from the damage of three crippling lockdowns, employment is the most pressing issue. The situation has been improving more rapidly than expected since the economy began reopening in April, but with some 400,000 Israelis still looking for work, there is much more that needs to be done.
Israel’s jobless rate for the first half of May was just 6.7%, compared to 7.9% for April and 9.5% for March, after averaging 16% for the whole of 2020. But returning to Israel’s record-low 3.4% unemployment rate on the eve of the pandemic will require strategic thinking.
For the past year, Israel has offered a generous economic safety net package for unemployed Israelis, guaranteeing as much as 70% of their original salary through June 2021. That model has been a lifeline for many households that suddenly lost their sources of income, but also disincentivized many workers from rejoining the workforce, allowing them to enjoy a paid vacation at the state’s expense. That plan ends at the end of the month, and it is unclear what will happen going forward after July 1.
A model that was put forward by outgoing Finance Minister Israel Katz set a maximum number of days that job seekers can receive unemployment benefits, based on their age and number of dependents, and unmarried people under age 28 will not be entitled to any additional benefits. Additional grants will be offered for employers, workers taking jobs at lower salaries, and those studying in professional retraining programs, in an effort to get as many people as possible back into the workforce.
However, Liberman said Wednesday night he will take a harder-line approach, stopping unemployment payments to all people under age 45 as of July 1. How things will play out remains to be seen.
The government will face pressure to develop strategies to continue to upgrade the workforce after the pandemic exposed large gaps between the 12% or so of the population that works in the hi-tech sector and the remainder of the population.
In addition, some 69% of Israel’s workforce, or 2.7 million workers, will need to acquire new professional skills to remain relevant in the workforce as technology makes their skill sets outdated in the coming years, according to a recent State Comptroller’s Report.
At the same time, many employers of low-skilled workers, especially in the restaurant and retail industries, are struggling to find workers to come back and fill the positions needed for their businesses to run properly. It remains to be seen whether July 1 will bring any change for them.
The ultra-Orthodox community will have increasing pressure on it to join the workforce in greater numbers, forgoing the subsidies for Torah study many have enjoyed until now. Liberman is known for his antagonistic views toward haredim who refuse to participate in the workforce, the army and mainstream education, and it is likely he will take aggressive steps to change the status quo in that sector.

Infrastructure projects

Investment in infrastructure projects is a classic part of the playbook to help bring a country out of recession, and Israel has gone all-in with plans to update the country’s Internet, water and public transportation systems, among others.
Coalition partners have added demands to invest more in developing roads and services in the West Bank, as well as the Negev and periphery towns.
Economists have advised that the government hurry to implement these programs now, when international credit agencies expect governments to be investing in growth, and not in several years, when the trend will be toward slashing fiscal policies. •