AnalysisNot a mere budget, but a recipe for dramatic social reform

Budget shows Bennett-Lapid gov’t aims to transform Israel, as Netanyahu once did

It’s a pattern too consistent to be coincidence: A dramatic crisis opens the political window for change, and Israeli governments find the courage to step through it

Haviv Rettig Gur

Haviv Rettig Gur is The Times of Israel's senior analyst.

Then-prime minister Benjamin Netanyahu and then-education minister Naftali Bennett (left) at the annual Bible Quiz at the Jerusalem Theatre on Independence Day, April 19, 2018. (Shlomi Cohen/Flash90)
Then-prime minister Benjamin Netanyahu and then-education minister Naftali Bennett (left) at the annual Bible Quiz at the Jerusalem Theatre on Independence Day, April 19, 2018. (Shlomi Cohen/Flash90)

In the throes of the 2009 financial meltdown, Barack Obama’s chief of staff Rahm Emmanuel famously advised to “never allow a good crisis go to waste.” Let the crisis, he said, be the instigator for a transformative policy shift.

The aphorism didn’t begin with Emmanuel. Winston Churchill was once credited with the insight. Indeed, it’s a basic truth of politics. A crisis, by definition, is a moment when the old order no longer provides clear solutions to new conditions and threats, when predicaments proliferate and outcomes are unknowable. From the inadequacy of the old order’s rules and privileges and from the dire peril of the moment, new ways of thinking are introduced into the world. A crisis is a moment of creation.

Israel’s current political moment is no exception to that rule. It’s been 18 months since SARS-CoV-2 arrived on Israel’s shores. It’s been 2.5 years since Israel first embarked on this new era of repeat elections and deeply dysfunctional governments. And amid the turmoil – because of the turmoil — the most dramatic budget bill in a generation is now headed to the Knesset.

This bill is no mere budget; it’s a collection of deep and consequential reforms with the potential to change Israeli society in important ways. It upends the old ways of thinking about the Israeli state’s responsibility for its Arab citizens; takes a sledgehammer to structural obstructions that have long plagued the Israeli economy, from protectionist import policies to state price-setting on basic staples; reimagines Israel’s public transportation network and environmental commitments, including slashing regulation and easing import rules on electric vehicles; opens the banking system to more competition, especially online and via mobile apps; dramatically increases spending on health and defense while cutting expenditures on most other things; and promises a major overhaul and streamlining of governmental red tape in a plan officials are trying to sell to the public as a “regulatory revolution.”

It does things long deemed politically unfeasible, such as raising the retirement age for women and opening the agricultural import market to competition.

It’s not clear that all those dramatic reforms will survive to the bill’s final version slated to come up for a final vote in the Knesset in early November. Opposition to some of the most dramatic reforms has been fierce. But even if it is watered down, it will still constitute the most dramatic and comprehensive set of governmental and social reforms in a generation. It’s been two decades, in the 2003 budget law advanced by then-finance minister Benjamin Netanyahu, since anyone has seen a bill that even aspires to such feats.

Finance Minister Avigdor Liberman, right, and Agriculture Minister Oded Forer, center, visiting Israeli farmers at Kibbutz Beeri, August 3, 2021. (Flash90)

Many have expressed surprise that an Israeli government that holds the narrowest possible Knesset majority, bickers constantly with itself, and is largely managed by political neophytes could have dared to put forward such an ambitious budget. Some have suggested that the government’s very fragility may be responsible for its bold plans. Ministers who fear they may not remain in office for very long are all the more eager to accomplish a great deal quickly.

But there’s a larger phenomenon at work, too, an implicit grasp by all parties in the new coalition that the crisis that now grips the country — the combined effects of the resurgent pandemic and the past two years of unprecedented political deadlock — has opened a rare window of opportunity for effecting profound and long-delayed change.

When Israel was its own worst enemy

It’s happened before.

In the 1970s, partly sparked by the 1973 war and high defense spending in its wake and then accelerating after 1977 during Likud’s first term as Israel’s ruling party, Israel’s economy entered a slow, implacable freefall. From 1979 to 1985, Israel entered a period of runaway inflation. The numbers were staggering: 133% in 1980, followed by 101% the following year, then 132%, 191% and 445% in 1984. The government was at a loss. Prime Minister Menachem Begin cycled through four finance ministers in six years, each tasked with righting the ship, each leaving it in worse shape than they found it.

Newly elected PM Menachem Begin, right, receives his job from outgoing PM Yitzhak Rabin, 1977. From the Dan Hadani Archive, The Pritzker Family National Photography Collection, National Library of Israel (Photo: IPPA Staff)

Israel replaced its currency twice in that period, jettisoning the lira in favor of the shekel in 1980, then abandoning the shekel in 1985 in favor of the new shekel, with the new currency’s value set by erasing three zeroes off the shekel it replaced.

The turnaround finally came in the 1984 election, which ended in a national-unity power-sharing government with a rotating prime minister. Labor’s Shimon Peres went first, to be followed by Likud’s Yitzhak Shamir two years later. Likud politician Yitzhak Modai was appointed finance minister. Unlike the succession of short-lived finance ministers who came before him, Modai, backed by Peres, thought big.

By 1985, inflation was headed past the 1,000% mark. The emergency had finally grown gargantuan enough to push aside the powerful interests and political partisanship that had previously prevented the kinds of deep reforms that could rescue the Israeli economy.

It was an extraordinary moment. Israelis in 1985 knew they were safe from their external enemies in a way that Israelis 20 years earlier had not known. But as the inflation crisis wore on and the government’s reform efforts repeatedly proved fruitless, they began to wonder if Israel itself hadn’t become its own worst enemy.

Yitzhak Modai in 1985 (Photo: Nati Harnik, GPO)
Yitzhak Modai in 1985 (Nati Harnik, GPO)

It was only when the crisis became sufficiently acute that Peres and Modai found themselves working harmoniously across party lines; that a Labor-led government finally brought itself to brow-beat the labor unions into accepting salary freezes and major industries into accepting price controls, that public spending could be drastically cut, that the Bank of Israel’s ability to lend money to cover deficits could be made illegal, and that many government-owned companies long treated as the special preserve of political apparatchiks could finally be privatized.

The crisis wasn’t, at its root, merely the unavoidable aftermath of the 1973 war, Israeli leaders came to understand. It was driven by a deeper and older structural problem. The inefficiencies of an economy long managed by statist ideologues and institutions had reached the breaking point, and the Peres-Shamir government of 1984 was wise enough to take advantage of the opportunity to make a clean break with the old ways of doing business.

The result was an unmitigated success: inflation dropped to 20% within two years, growth resumed, and the Israeli economy was humming along toward present-day levels of stability and growth by the time the Russian-speaking immigration wave began in the early 1990s.

It is hard to exaggerate the importance of Modai’s reforms to Israel’s future strength and prosperity. The Bank of Israel was freed from government control by law, enabling it to set monetary policy independent of the government’s immediate cash-flow needs. The government’s iron grip on vast swaths of the economy was shaken loose through privatization, setting a precedent that would accelerate throughout the 1990s and 2000s. But perhaps most profoundly, the old debates between socialists and liberalizers were settled, and free-market-oriented economic policy became the baseline for judging government spending from 1985 onward.

Then-prime minister Yitzhak Shamir (left) and then-foreign minister Shimon Peres at a Mimouna celebration at Sacher Park in Jerusalem, March 15, 1988. (Nati Harnik/Government Press Office)

Suicide bombers and airline privatizations

Then it happened again.

The Second Intifada that began in October 2000 is little remembered today overseas. Scholars and think tank analysts routinely pen thick books on the Israeli-Palestinian conflict with barely a mention of the event. But for Israelis and Palestinians, both in real time and for the two decades that have followed, it was a searing, watershed event that upended assumptions and profoundly changed how each side viewed the other.

It sparked a crisis in Israeli politics, especially on the left, from which the political system has yet to recover. And it plunged Israelis and Palestinians into an economic nosedive unseen before or since.

It’s commonly understood that the Palestinian economy before 2000 was deeply integrated into and dependent on the Israeli economy — and was flourishing because of it. Israelis could safely travel in Palestinian cities in those days and had developed a habit of buying cheaper Palestinian goods and services, from car parts to dentistry, valued at hundreds of millions of dollars annually. Together with overseas tourists, they dropped half a billion dollars annually, equal to over 10% of the Palestinian GDP, at Jericho’s casino. Palestinian unemployment dropped in the Oslo years from nearly 25% to 10%. About 150,000 Palestinians, or nearly a fifth of employed Palestinians, held jobs in Israel earning higher salaries than could be found in the Palestinian economy. Palestinians were the most highly educated Arab people at the time, constituting double-digit percentages of Hebrew University’s student body, and Palestinian per capita income was the highest of any non-oil-producing Arab country.

Palestinians buy fast food from the food court in a new indoor shopping mall in the Gaza Strip, in Gaza City, Feb. 18, 2017. (AP Photo/ Khalil Hamra)

The Palestinian economy needs Israel to thrive. That’s as true today as it was then, as true under occupation as it will be in a Palestinian state, and as galling to today’s Palestinian ideologues as it was to the ideologues of a generation ago.

But Israel’s economy needed the Palestinians, too, at least in those days. As they grew wealthier from trade with Israel, Palestinians became eager consumers of Israeli products, with some 1.7 billion dollars in Israeli exports to the PA annually, or 7% of total Israeli exports excluding diamonds. Palestinian labor drove the Israeli agriculture and construction industries.

The onset of the Second Intifada reversed those trends, hurting both sides deeply and in interconnected ways. A flourishing customs-free trading area that was pushing Palestinians ever upward and helping to drive Israeli economic growth was suddenly, in the terror wave and the resulting regime of curfews and checkpoints, transformed into “a war zone,” in the words of Israeli economic analyst Sever Plocker.

So great was the pivot that many Israeli analysts like Plocker, flabbergasted by the Palestinian turn amid peace hopes and unprecedented economic flourishing toward massive violence, speculated that the Second Intifada was driven by a “deliberate decision” by Yasser Arafat “to undermine what he saw as dangerous signs of stabilization and prosperity in the West Bank and Gaza,” the sort of prosperity that might undermine his authoritarian rule and sideline his revolutionary agenda.

Among Palestinians, unemployment quadrupled almost immediately to as high as 40%, while the loss of the Palestinian labor supply was cited by the IMF as a major factor driving the steep recession in Israel after 2000. Israeli and Palestinian consumers vanished from the others’ horizons. Tourism, a multi-billion-dollar industry in the Holy Land, crashed on both sides of the Green Line. The Bank of Israel estimated that the violence in 2002 alone, at the height of the Second Intifada, cost Israel 3.8% of its GDP. Checkpoints and roadblocks went up everywhere in the West Bank and Gaza, choking the internal Palestinian economy. Israelis fearful of suicide bombings stayed away from public spaces, emptying malls and markets for long stretches. Extended uncertainty dried up investment. The absolute number of poor in Israel grew by 22%.

Police and paramedics inspect the scene after a suicide bomber blew himself up on a rush-hour bus near the Jerusalem neighborhood of Gilo during the Second Intifada, on June 18, 2002 (photo credit: Flash90)
Police and paramedics inspect the scene after a suicide bomber blew himself up on a rush-hour bus near the Jerusalem neighborhood of Gilo during the Second Intifada, on June 18, 2002. (Flash90/File)

The Palestinians suffered more from the economic downturn since their economy was much smaller and their dependence on Israel far greater than Israel’s dependence on them. But the Israelis were nevertheless experiencing their sharpest-ever recession amid a campaign of suicide bombings and other terror attacks that by 2002 was in its third consecutive year with no end in sight.

It was into that maelstrom, amid the worst economic emergency since the hyperinflation of the 1980s, that Benjamin Netanyahu, by then already a former prime minister, strode with the confidence of a revolutionary, embraced the crisis — and reshaped the Israeli economy.

As Ariel Sharon’s finance minister from 2003, Netanyahu’s first act was to declare that Israel’s economic troubles weren’t caused by the intifada, but by “a system in which a smaller business sector must feed and support an enormous and expanding public sector.” Israeli government spending as a share of the economy was among the highest in the world, as was the tax burden on the country’s middle class. State-run monopolies had the energy and infrastructure industries in a chokehold. Israel’s own government, Netanyahu argued, was inflicting far more economic harm than the suicide bombers of Fatah and Hamas.

To answer that challenge, he presented his “Economic Recovery Plan,” which dramatically reduced welfare spending, including child subsidies for large families on which large parts of the Haredi community depended, raised the retirement age, lowered taxes and expedited the sell-off to the private sector of hundreds of government-owned companies, including the El Al airline.

It was an extraordinary moment: Netanyahu used the economic downturn of the Second Intifada to launch a broadside on the deepest structural problems in the Israeli economy, from infrastructure monopolies to public-sector spending.

Benjamin Netanyahu steps out from a small train at Jerusalem’s zoo on October 10, 2002. (Flash90)

The emergency Netanyahu encountered in 2003 — a recession sparked by suicide bombings detonating weekly on buses and in pizzerias over three-plus years — had nothing to do with the reforms. But as in 1985, the crisis was the psychic shakeup that the public and the government bureaucracy needed to accept deep change. It silenced outrage and weakened the resolve of special interests. It opened the window.

1985, 2003, 2021

Today’s Netanyahu is not the radical reformer of 2003. Few fundamental reforms have moved forward since he reentered the prime minister’s office in 2009. Where Finance Minister Netanyahu hungered for momentous transformations, Prime Minister Netanyahu invariably favored stability. Even the 2011 cost-of-living protests produced almost no policy changes from Netanyahu’s governments in the decade since. Countless problems, from economic marginalization and violence in the Arab community to price-hiking overregulation of imports to the steadily worsening blight of traffic jams in the major metropolitan centers, have gone mostly unaddressed. Few reforms were advanced, and fewer still were implemented.

Until now. Until the formation of the fragile, ever-teetering, crisis-born government of Naftali Bennett and Yair Lapid.

Very few of the reforms being advanced by this government have anything to do with the pandemic or the political crisis of repeat elections. Neither the pandemic nor the underlying political deadlock will be ended by the serious attention this government is giving to those longstanding challenges.

A resident of the Amigor retirement residence receives her third COVID-19 vaccine dose from a Magen David Adom worker in Jerusalem on August 4, 2021. (Yonatan Sindel/Flash90)

Nor is it certain that the reforms — if, indeed, this narrow coalition manages to pass them into law by November — will prove as effective and beneficial as the changes wrought by Modai in 1985 or Netanyahu in 2003.

The point here is simpler. As in those years, in a pattern too consistent to be coincidence, the broader crisis liberated the political system from comfortable old habits and assumptions, opening a political window for deep reforms that comes but rarely in Israeli political life.

That’s the Israeli experience in a nutshell: Profound crises always carry a brightly shining silver lining. The crisis opens a window, and it’s up to the political leadership to take advantage of it.

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