Cabinet approves NIS 13.7b in state funds to meet Haredi coalition demands

Disbursements include NIS 3.7b to ultra-Orthodox yeshivas; Treasury warns spending disincentivizes Haredi labor and could lead to huge losses in GDP, higher taxes

Sharon Wrobel is a tech reporter for The Times of Israel.

Illustrative: Ultra-Orthodox Jewish men study in the Lithuanian Slabodka yeshiva in the ultra-Orthodox city of Bnei Brak, July 8, 2013. (Yaakov Naumi/Flash90)
Illustrative: Ultra-Orthodox Jewish men study in the Lithuanian Slabodka yeshiva in the ultra-Orthodox city of Bnei Brak, July 8, 2013. (Yaakov Naumi/Flash90)

The cabinet on Sunday approved NIS 13.7 billion ($3.7 billion) worth of coalition funds mainly allocated in support of ultra-Orthodox institutions and programs as the Treasury warned that the promised funds could lead to trillions of shekels in lost gross domestic product in the coming years.

The coalition funds worth NIS 13.7 billion are higher than the previously call for NIS 12.5 billion in spending. Agreement over the funds comes as the government has just over two weeks to pass the proposed two-year, 2023-2024 trillion-shekel overall budget, through the committee process and votes on the Knesset floor before its May 29 deadline, or risk triggering an automatic dissolution of parliament and snap elections.

Prime Minister Benjamin Netanyahu’s Likud party has made generous promises of billions of shekels to secure the support of its ultra-Orthodox and far-right coalition partners, including ample funding for Haredi education and religious initiatives. Out of the NIS 13.7 billion, about NIS 3.7 billion is promised to be spent on increasing the budget for stipends at religious yeshiva student institutions. About NIS 1 billion are directed as an allowance for a food voucher program being pushed by Shas leader Aryeh Deri.

Another NIS 1.2 billion is budgeted for private, non-supervised educational institutions, which do not teach core subjects such as math and English. Additional funds will be funneled for ultra-Orthodox education, building religious buildings and supporting Haredi Jewish culture and identity.

The coalition funds have in recent years been distributed from the state budget to preferred and sectoral goals as demanded by the parties, and have evolved as a condition for their support to pass the budget. At the end of March, the Knesset approved in its first reading the state’s 2023-2024 overall budget. It allocates NIS 484.8 billion this year and NIS 513.7 billion in 2024, up from NIS 452.5 billion in 2022.

Opposition leader Yair Lapid called the amount and allocation of coalition funds “irresponsible and corrupt,” and a robbery of public money.

Head of the Finance committee MK Moshe Gafni and Israeli finance minister Bezalel Smotrich at a hearing on the state budget in the Knesset Finance Committee, April 16, 2023. (Yonatan Sindel/Flash90)

“This is the money of the productive public in Israel,” Lapid stated in a video message. “Instead of investing it in the education of our children, in lowering the unbearable high cost of living, in economic growth engines, in protecting day care centers in the Gaza Strip, they invest it in buying votes.”

“Netanyahu has sold the Israeli economy and the future of our children to the Haredim and Smotrich so he can stay in power,” he added.

Ahead of Sunday’s vote, the Finance Ministry’s Budgets Department head Yogev Gardos warned that the allocation of funds to ultra-Orthodox institutions and initiatives creates negative incentives for Haredi men to seek employment and will harm the country’s labor market and the economy as a whole.

“Increasing the budget for non-supervised private educational institutions, while establishing a mechanism for the provision of allowances through the distribution of food vouchers, and raising yeshiva budget funds are expected to create a system of anti-economic incentives that encourages an exodus from the labor market and lower the earning capacity of ultra-Orthodox society,” Gardos wrote in a report.

“Even before the implementation of the government’s decision and its expected negative effects on the economy, with no change in the employment rate among ultra-Orthodox men, the loss of cumulative GDP until the year 2060 is expected to be NIS 6.7 trillion,” the report warned.

Furthermore, Gardos cautioned that if the employment participation rate among Haredi men is not encouraged, by 2065 the government will have to increase direct taxes by 16% to maintain the same level of services that it provides without increasing the deficit.

Israel’s ultra-Orthodox population, which constitutes about 13.5% of the country’s total population is expected to grow to 16% in 2030. The ultra-Orthodox population’s current growth rate of 4% is the fastest of any group in Israel, according to Central Bureau of Statistics data.

The cabinet votes to approve the 2023-2024 budget, in Jerusalem on February 24, 2023. (Courtesy)

The Finance Ministry has earmarked an increase in the participation rate of ultra-Orthodox men and female Arabs in the labor force as the main potential growth engine for Israel’s labor market for the coming years. As of the end of 2022, Haredi male participation rate in the labor market stood at 53% compared to 87% among non-religious Jewish men, according to the Finance Ministry report.

In the report, the Treasury noted that historically increasing the budget for Haredi educational institutions has led to a rise in the number of graduates who are lacking qualifications and requirements for integration into the employment market.

“Better education and productivity and creating incentives to go to work are critical for continued growth in Israel, as well as to reduce the GDP per capita gap between Israel and leading countries in the world,” Gardos emphasized in the report.

Over the weekend, Standard & Poor’s (S&P) decided to keep Israel’s favorable AA credit rating intact, but cautioned that it expects Israel’s fiscal performance to weaken in 2023. In the first two months of the year, Israeli government revenue declined by 4% year-on-year after growing by almost 14% in nominal terms last year, boosted by exceptional tax income, S&P noted. The agency sees growth in Israel’s economy slowing to 1.5% in 2023 from 6.5% in 2022.

S&P forecasts for Israel’s government deficit to widen to 2.5% of GDP in 2023 and narrowing to 2% in 2024. That is after the government in 2022 posted the first budget surplus in 35 years of 0.6% of GDP as state revenues rose 4.8% to NIS 468.5 billion, and exceeded total expenditure of NIS 458.8 billion.

In its annual report, the International Monetary Fund last week described Israel’s fiscal stance as “appropriate,” citing stronger-than-anticipated fiscal consolidation in 2022 which enabled the rebuilding of fiscal buffers earlier than expected.

“The fiscal stance seems adequate to preserve buffers, but additional fiscal space is needed for boosting potential growth and reducing inequality,” the IMF said. “There is scope to raise income tax revenues.”

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