The government dropped a quick exit from the crisis with its own hands


The Ministry of Finance’s chief economist, Shira Greenberg, has maintained a professional tone and refrained from criticizing the government, but his bottom line is clear – the functioning of the government in recent months has made the reasonable scenario for dealing with the crisis too optimistic. Although the incidence of the disease has started to skyrocket in recent weeks, the data from the Treasury show that the forecast from April has been too optimistic since its inception.

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Along with the governor’s warnings about losing control of the deficit, the unity government headed by Benjamin Netanyahu must put the good of the economy before political interests whether they go to the polls or reset and approve a budget for next year.

Minister of Finance Israel Katz Photo: GPO

Examining the number of job seekers in the face of government decisions perhaps best expresses the nuance that insists on being ignored in government and it is really hard to put a finger on it – the gap between coronary heart disease and dealing with it and the harm caused by government conduct.

The main jump in the number of job seekers came towards the end of March when they moved the private sector to operate in a limited program of 30%. Although since then at least theoretically jobs can already return to routine under the “purple mark” – in practice the number of job seekers as of last month has dropped to an insignificant level. Not only in detailing the future scenarios of the finance economists they emphasize that the pessimistic scenario that by the end of the year the unemployment rate will be 15% and at the end of next year 12.4% “does not refer to the effect of specific restrictions, but to the general situation where uncertainty about dealing with the virus “Many businesses reduce the number of their employees, and sometimes even close the business.”

In less laundered words warn the Treasury against the continued zigzagging of the government and the sense of uncertainty it instills in the public with its volatile decision-making way.

Impairment of economic activity Impairment of economic activity

The more optimistic scenario discussed by the Ministry of Finance estimates that by the end of 2021 the unemployment rate will stand at 9.7% and by the end of 2021 it will stand at 8%. These data are particularly interesting when considering the decision under the latest assistance package that when the unemployment rate falls between 10% and 7.5%, 90% of unemployment benefits will be given today. In fact, according to both scenarios, the aid package that is supposed to end in June 2021 will continue for a long time afterwards at a cost of tens of billions of shekels.

The bottom line of Greenberg’s latest forecast is that GDP this year will shrink by 5.7%, while in April it was estimated that GDP will shrink to 5.4%. Instead of an average growth forecast of 3% which is expected to increase GDP by 2023 by 12.3% compared to the end of 2019, the Chief Economist Division estimates that in the relatively optimistic scenario, of gradual recovery – i.e. hence only higher – growth next year will stand at 5.7% and then on 4.8% but still by the end of 2023 the GDP will increase by only 8% compared to the end of 2019.

More worrying is the austerity scenario, where recovery will be slower. According to this scenario, even in 2022 the economy will not return to its size at the end of 2019. In 2023, its size will reflect growth of 2.1% compared to 2019. However, according to Prof. Leo Leiderman, Chief Economic Adviser of Bank Hapoalim, “The optimistic scenario is receding. Unfortunately, the second wave of Corona infection has reached the world and Israel earlier than predicted. “There are no significant signs of a stabilization or recovery in the coming months.”

The expected change in GDP The expected change in GDP

According to Leiderman, the bank estimates that the economy’s GDP will fall by close to 8% this year and the unemployment rate will remain high. “I think it is desirable that the budget and economic policy take into account the pessimistic scenario, which has become more realistic today,” says Leiderman.

When looking at the difference in the forecast between the earlier and the current scenario – it is clear that the gap is in the past months. Economists in the Ministry of Finance expected that from May 24, the impact on economic activity would be gradually reduced by the end of the year. In practice, this did not happen, and as can be seen in the latest forecast, at least for the past few months, the economy has maintained the same level of injury of about 10%.

While the new austerity measures have only recently begun, the economy has not taken advantage of the past months to return to normal. This can certainly be explained in light of the uncertainty regarding a future outbreak of the disease, but certainly also the failed steps taken by the government in an attempt to rehabilitate the economy, such as grants to encourage employment amounting to NIS 6 billion. Worse is the uncertainty she has created about her decisions, through decision-making and their arbitrariness.

Unemployment scenarios Unemployment scenarios

According to the latest forecast, starting in August, the volume of damage to activity is expected to gradually decrease over the coming year, so the volume of damage this year will be 8.9%. This of course will not happen if the uncertainty and trust among the public continues. In the worst case scenario, the damage to the economy will not decrease in the coming months and will jump next winter following another outbreak – so the extent of the damage this year will be 10.2%.

One significant figure is missing in the chief economist’s forecasts, a figure that indicates quite a bit about the functioning of the government, of course – the level of the deficit. At the beginning of the crisis, economists in the government and the Bank of Israel were unanimous about providing assistance at the expense of increasing the deficit. The government’s decisions in recent months on spending that will not really help populations affected by the corona crisis, and the growing fear of losing control of Prime Minister Netanyahu and Finance Minister Katz in light of the coalition’s fragile dynamics – have led senior finance officials and the Bank of Israel to change the tune.

Minister of Economy Amir Peretz Minister of Economy Amir Peretz Photo: Alex Kolomoisky

Although in previous forecasts there was a reference to the deficit – there is none. According to estimates not officially released by the Ministry of Finance, the deficit is expected to jump to 13.1% after the decision to grant the grants to all citizens, while in April and May there was talk of around 11%. And this without even calculating the new box in favor of education in the amount of about NIS 4.2 billion, which the government decided on yesterday. This may also explain why the Budget Department has so far not published the numerator document it was supposed to publish in June, as it could reveal a picture that will shock not only the public but also rating companies and investors abroad. The deficit is expected to jump in debt-to-GDP ratio. Has not yet been reflected in 85% forecasts by 2023.

As part of the analysis of the consequences of the crisis and the provision of forecasts, made by a macro and forecasts team in the Chief Economist Division headed by Lev Drucker, the Chief Economist also devoted reference to the capital market. After the shock of the crisis, for example, from mid-February to late March The S & P500 has fallen by about 33%, since by the end of March most of the world’s most prominent stock exchanges have already recovered from the declines.

Growth rate Growth rate

According to the Ministry of Finance economists, this was helped by the aggressive fiscal and monetary measures taken in the various countries, along with expectations of the strength of the large companies, especially the technologies, as well as optimism regarding the decline of the disease. However, the Ministry of Finance wishes to cool the enthusiasm and emphasizes that “it is important to note that at present there is a large gap between the damage to real activity and the recovery recorded in the capital market, when it is difficult to assess whether the recovery reflects the expected real damage to future companies’ profitability.”


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