Finance Ministry chief economist warns judicial shakeup poses risk to growth

Even though judicial changes have not yet been completed, investments and credit rating could be harmed, writes Shira Greenberg in report accompanying draft of state budget

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

Israeli workers stage a one-hour strike against in Tel Aviv against the government's judicial overhaul plan. (Courtesy)
Israeli workers stage a one-hour strike against in Tel Aviv against the government's judicial overhaul plan. (Courtesy)

The Finance Ministry’s chief economist warned that the planned changes to Israel’s judicial system are poised to harm economic growth and investments in the country.

“At the time of writing this document, substantial legislative amendments concerning the legal system are underway in the Knesset,” the Finance Ministry’s chief economist Shira Greenberg wrote in a report accompanying the multi-year budget draft 2024-27 that was sent to the government on Thursday.

“To the extent that the legal reform is perceived by the market as damaging the strength and independence of state institutions and increases uncertainty in the investment environment, this may harm economic activity and in particular private investments,” Greenberg wrote in a section titled “Economic Effects of the Reform.”

Greenberg cited studies that found a positive relationship between the strength and independence of state institutions and economic growth, scope of private investments, and in particular the scope of foreign direct investments.

“Also, the credit rating agencies are likely to react to these developments,” Greenberg warned.

The legal overhaul would grant the government total control over the appointment of judges, including to the High Court, all but eliminate the High Court’s ability to review and strike down legislation, and allow politicians to appoint — and fire — their own legal advisers.

Shira Greenberg, chief economist of the Finance Ministry, attends a press conference at the Finance Ministry office in Jerusalem, September 23, 2019. (Flash90)

Leading economists, including former Bank of Israel governor Jacob Frenkel, have warned in recent weeks that the planned steps to weaken the country’s legal and democratic system of checks and balances are already creating uncertainty among investors and entrepreneurs, with some of them starting to move their money outside Israel.

Frenkel, who until recently chaired JP Morgan Chase International, lamented that each day of the government’s legislative blitz makes the situation worse, as Israel’s international image is dealt a serious blow and major companies and investors move elsewhere.

As the government pressed ahead this week with passing the first reading of a bill that makes up a significant part of the controversial judicial overhaul, to cement government control over judicial appointments, the shekel depreciated to the weakest level in three years against the US dollar and Tel Aviv shares declined.

Over the past month, the shekel has lost almost 7% of its value amid mass protests and dampened market mood driven by fears that the judicial shakeup could negatively impact the country’s credit rating and scare away investors.

Some local firms and startups have already begun to withdraw their money, at the behest of their overseas investors, to diversify risk and hedge their assets before the bills head to final approval.

The Finance Ministry formulated the budget draft estimating economic growth of 3% in 2023 and 3.2% in 2024. That compares with the Bank of Israel’s growth forecast of 2.8% in 2023 and 3.5% in 2024. Israel’s economy expanded 6.5% in 2022.

Among the risks to the estimates, Greenberg cited the planned judicial overhaul, the Russia-Ukraine conflict and the European energy crisis, higher inflation and global recession, capital market declines and a slowdown in the high-tech industry, and fiscal policy.

“At the time of writing this document, there is uncertainty regarding the scope of the [public sector] salary agreements and the coalition agreements which will be agreed upon,” Greenberg wrote. “Sharp wage increases in the public sector beyond those taken into account in the forecast, or higher than expected costs of the coalition agreements, may harm economic activity.”

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