The ruling Israeli right-wing coalition is finding it difficult to promote its economic program to voters, as its performance over the past four years has seen a mix of rising food prices, increased taxes, and families paying thousands of additional shekels, against a backdrop of billions of shekels being distributed to coalition parties.
Over the four years of the Israeli right coalition, tens of thousands of families have paid the price for its continuity, suffering from a decline in living standards, rising prices and taxes, a significant budget deficit, and a downgrade of the occupation state’s credit rating for the first time in its history. The average family has lost thousands of shekels annually due to increased indirect taxes and reduced services.
Injecting funds into settlements
At the same time, billions of dollars have been funneled into coalition funds, particularly to settlements in the West Bank and to Haredi schools whose students evade military service. While the government promised to reduce the cost of living, food prices have risen four to five times faster than they were in the four years preceding its establishment, and monopolies have continued to raise prices.
On the external front, Moody's agency decided to downgrade the occupation state’s credit rating by two notches, from A2 to Baa1, with a negative outlook, stating that its economic and financial institutions have not been effective in preventing measures that harm credit indicators. Similarly, credit rating agencies Standard and Poor’s and Fitch also downgraded the rating, leading to increased interest costs that the state pays on its debts.
It’s noteworthy that the main reason for this downgrade is the huge budget deficit resulting from the war and the government’s mismanagement, where the current deficit ratio stands at 8.3% of GDP, with the cumulative deficit reaching nearly 70%, compared to 60% in 2022. To reduce the deficit, taxes have been significantly raised, and spending on social services has been cut, while military spending has increased in comparison to the vast needs during wartime.
Accumulating tax burdens
The right-wing coalition has continued to distribute money indiscriminately without restrictions, while imposing bills for increased expenditures on families, sharply raising the burden of indirect taxes from 17% to 18%. Contributions to national insurance and health tax have increased, child benefits have been frozen, and the average family has lost between 8,000 and 12,000 shekels annually due to these decisions. Taxes have increased by about 35 billion shekels since the outbreak of war in October 2023.
While the government has been cutting family budgets, the flow of coalition funds continued, with over 21 billion shekels being distributed, most of which went to Haredi "yeshiva" schools, despite their students evading military service. These funds were also distributed to settlers in the West Bank, who comprise only 5% of the Israeli population, amidst a difficult war and a tremendous increase in deficits and taxes.
The government chose to raise indirect taxes on all Israelis, while maintaining the budgets of its coalition partners, while reserve soldiers bore the economic and security burden of the war, led by Finance Minister Bezalel Smotrich, who also serves as a minister in the Ministry of Defense and is responsible for the settlements. He intends to inject 2.7 billion shekels over five years into infrastructure in the West Bank, of which 1.1 billion shekels is allocated for the establishment of settlements and bolstering them, including 660 million shekels for 17 new settlements.
The Israeli objective lies in entrenching a reality that future governments will find difficult to change, with nine major road projects in the West Bank costing about 3.1 billion shekels. While families have paid high value-added taxes, billions of shekels have been directed to a segment of Israelis that does not exceed 5% of the general public.
While Smotrich claims that the economy continues to grow even during the war, this is a misleading interpretation of the data, as Israel's per capita GDP shrank by about 0.6% during the war, living standards declined, and per capita GDP growth nearly halted after the government was formed and the launch of the "legal coup" which raised investor concerns and shook markets long before the war.
The cost of war and aggression
A two-year decline in living standards for 2023-2024 is an exceptional event in the occupation state, as the decline in per capita GDP during the current war has been less than during the two previous major crises: the second intifada 2000-2005 and the COVID-19 pandemic 2019-2021. As long as the war continues, economic disturbances will persist.
While the government’s electoral program promised to reduce the cost of living, its term has seen food basket prices rise four to five times faster compared to previous years, including 80 commonly sold products in local stores by 19.6%, while online shopping saw a 19% increase, and discount stores by 14.5%, as revealed by a survey of 700 branches of major chains, affecting the poorest segments of society significantly.
Regarding Israel's credit rating downgrade, Moody's indicated geopolitical risks and concluded that government institutions have not been effective in preventing measures that harmed credit indicators.
The economy on the brink of collapse
While Israelis present their security and military account regarding the war with Iran, others have laid bare the economic bill, as the vast gap in public coffers has become evident. The occupation government merely defined those affected by the war as limited to the private sector, meaning that the economic cycle is being pushed to the brink of collapse, and the general Israeli public will pay a heavy price for this war.
As always, there is war, there are results, and there is a progress report, presented by the Governor of the Bank of Israel, Amir Yaron. The data in the bank’s annual report reflects an unprecedented economic burden, with expenditures reaching about 352 billion shekels since the beginning of October 2023, and direct combat with Iran has increased the average cost to between 1.5 and 1.7 billion shekels daily.
The central bank governor hasn’t hesitated to deliver sharp criticisms of the state’s economic performance, as the Israeli economy will not be able to continue absorbing the huge expenses on armament and reserves, nor maintain the inflation of sectoral funds in the long term. Without a sharp reduction in non-growth-enhancing spending, the international community’s confidence in Israel’s financial stability will be at real risk.