Former Treasury officials: Overhaul will ‘severely, irreversibly’ damage economy

A group of former officials in the Finance Ministry called on Sunday on Finance Minister Bezalel Smotrich to halt the government’s controversial judicial overhaul, saying it would “severely and irreversibly damage the Israeli economy.”

The signatories to the letter previously worked in the ministry’s Budgets Department, which operates across the government to prepare the national spending plan.

“We anticipate severe damage to the Israeli economy, with the first indications already visible today,” the former officials warned.

“The implication of the reform on the Israeli economy will manifest itself, among other things, in a flight of capital abroad, a loss of trust among local and foreign investors, a devaluation of the shekel, an increase of inflation, a downgrade of the credit rating (as Fitch and Moody’s warned just a few days ago), an increase in interest payments, and a hampering of economic growth,” they wrote.

Last week, the Moody’s rating agency said the government’s proposals could weaken the country’s institutional strength and negatively affect its economic outlook. Before that, Fitch cautioned that the judicial overhaul could weaken institutional checks, leading to “worse policy outcomes or sustained negative investor sentiment.”

The agencies’ warning were further signals from the business community that the government’s plans may hamper continued investment in the country, with some investors and firms already curtailing or completely freezing the flow of money into Israel.

Finance Minister Bezalel Smotrich at a press conference in Tel Aviv, March 2, 2023. (Avshalom Sassoni/Flash90)

The signatories to the letter wrote that this would lead to a fall in state revenues, which would in turn require government expenditure cuts that “will cause profound damage to the social and economy welfare.

“We anticipate that social objectives such as the reduction of poverty and the building of employment security, healthcare and education will be adversely affected. The economy’s growth potential will not be realized and necessary investments in infrastructure will be postponed,” they charged.

“Without a strong, stable, and independent judicial system, it will not be possible to uphold the principles of a free, efficient, competitive, equitable and growing economy,” the letter read, noting that there would no longer be a guarantee of protection for property rights and individual freedoms, or safeguards against political and governmental corruption.

“Without safeguarding the independent and effective judicial review on the actions of the government and Knesset, it will not be possible to guarantee the efficient, equitable and just allocation of resources in the economy,” the former officials warned.

The letter said that foreign investors “seek strong and independent judicial systems as an essential prerequisite for their investment,” meaning that there could be a rapid movement of capital out of the country as well as a risk to future cashflow into Israel.

The signatories said that while the “erosion of the resilience of the Israeli economy has already begun,” the process could be reversed if the overhaul were to be stopped immediately.

An aerial picture shows a protest in Tel Aviv against the government’s controversial judicial overhaul legislation, March 11, 2023. (Jack Guez/AFP)

The former officials who signed on to the letter noted that their warning was “extremely unusual, probably without precedent,” but said this showed the fact that the “Israeli economy is entering an increased danger zone.”

“We fear this change will cause irreversible damage to the Israeli economy and the texture of the society in Israel,” the letter read, noting that while outdated systems do need reform, the changes need to be discussed and negotiated.

“No reform, especially a reform that addresses the fundamentals of governance and the balance between the branches of government, can be carried out in such an extreme manner by exploiting a political opportunity, without adequate examination and without achieving a broad consensus,” the signatories said.

The letter concluded with a plea to Smotrich personally, asking him to stop the reform and noting that “responsibility for the effects of the reform on the Israeli economy are solely yours.”

The legislative plans by the right-religious government, Israel’s most hardline to date, have sparked mass public protests for over two months, as well as fierce backlash from opposition politicians and dire warnings from economists, business leaders, legal experts and security officials.

Former US Federal Reserve chairman Ben Bernanke warned that the planned overhaul would “cause tremendous damage,” in quotes aired by Channel 13 news on Saturday. “Israel needs to build a consensus regarding any significant change in the legal system,” Bernanke told the network.

Former US Federal Reserve Chair Ben Bernanke speaks at the Brookings Institution, October 10, 2022, in Washington. (AP Photo/Alex Brandon)

The report did not provide Bernanke’s comments in English, only airing text quotes of his statements translated into Hebrew.

“Israel is a small and open economy that depends on international trade and international investments for economic growth and prosperity,” Bernanke reportedly said. “There will be tremendous damage to the security of foreign investors, trading partners, and Israeli entrepreneurs as a result of sudden institutional changes that will increase uncertainty, create new legal and political risks, and jeopardize the rights of minorities.

“To ensure that Israel’s extraordinary economic success continues, Israel needs to move slowly and build a broad consensus regarding any significant change in its legal system or form of government,” he added.

Bernanke, who was awarded the 2022 Nobel Memorial Prize in Economic Sciences, served as Federal Reserve chairman during the 2008 financial crisis.

Last week, former US Treasury secretary Lawrence Summers said that Israel was “walking too close to a ledge” with the government’s proposed judicial overhaul.

Summers’ comments came hours after Israeli tech unicorn Riskified announced that it would be moving $500 million out of the country and offering relocation packages to some interested workers.

Tech workers march in Tel Aviv to protest against the government’s planned overhaul of the judicial system, January 31, 2023. (Tomer Neuberg/Flash90 )

Last month, Tom Livne, the founder of another of Israel’s most successful tech unicorns — Verbit — declared that he was leaving the country and ceasing to pay taxes in protest over the new hardline government’s planned judicial overhaul.

Livne, whose hybrid AI-based and human transcription and captioning software company was valued at $2 billion in its last funding round in late 2021, said that he encouraged other prominent tech executives to follow his lead.

Israeli cybersecurity startup Wiz, which raised $300 million at a $10 billion valuation in its latest private funding round, said last month that the capital will not be invested in Israel given the uncertainty around the country’s judiciary system.

A group of hundreds of Israeli economists issued a fresh warning earlier this month that a financial meltdown could occur even more “powerfully and faster” than they had originally forecast when they penned an “emergency letter” cautioning that the far-reaching judicial shakeup being advanced by the government could have grave implications.

Critics of the government’s plan say it will weaken Israel’s democratic character, remove a key element of its checks and balances and leave minorities unprotected. Supporters have called it a much-needed reform to rein in an “activist” court.

A number of polls have indicated the legislation is broadly unpopular with the public.