On Saturday evening, Prime Minister Benjamin Netanyahu waxed enthusiastic on social media.
“A good week!” he wrote. “Here’s another impressive vote of confidence in the economic policy we’re leading, when the international ratings agency S&P leaves Israel’s credit rating at its high level, without change, in the middle of the global coronavirus crisis, while it lowers the credit rating for [some other] developed nations.”
Unfortunately, S&P’s own explanation for its decision was less encouraging.
Israel possessed “credit strengths,” the agency said – namely, “its wealthy and resilient economy, its net external creditor position, and the benefits that accrue to the state from flexible monetary settings and a relatively deep pool of domestic savings.”
That is, the fundamentals are strong. The country is wealthy, with relatively low debt, and generally well placed to emerge from the pandemic mostly unscathed.
Netanyahu deserves no small part of the credit for that strength. He has led Israel for 14 of the last 24 years, and for two more years in 2003-5 served as one of the more influential finance ministers in living memory. It was in that short term as finance minister that he pushed through vital reforms that shrank the public sector, reduced entitlements to nonworking Israelis, and privatized major government-owned companies. These reforms were credited with catalyzing growth in the decade following the economic crash of the Second Intifada.
But Netanyahu’s boasting notwithstanding, S&P clarified last week that it was betting on Israel despite, not because of, its current political leadership.
“Domestic political uncertainty remains high,” it warned investors. “The country has gone through three inconclusive elections over the past 18 months…. Despite the coalition formation, Israel has yet to adopt a state budget for 2020 after the previous August deadline was delayed, at the last minute, until the end of December…. Fragmentation within the government [runs the risk of] yet another election in the coming months.”
The agency’s statement echoed Moody’s decision last month to leave Israel’s rating untouched despite a “polarized political system [that] weighs on fiscal policy effectiveness.”
Despite all that political chaos, said S&P, Israel remains a good investment — because it has strong state institutions: “Historically, the inherent political volatility has not meaningfully affected the economy; we saw this in the strong 3.5% growth rate in 2018-2019. We view this as a testament to the country’s comparatively strong institutional settings.”
But what happens if those institutions begin to show signs of cracking? What would Israel’s prospects look like if the health officials in charge of the pandemic fight and the finance officials in charge of stabilizing and jumpstarting the nation’s economic recovery started quitting en masse, and could not be replaced by bickering politicians?
We’re about to find out.
Health Ministry empties out
The state has been operating without a budget for 11 months, and officials told The Times of Israel last week that no one in the Finance Ministry is even working on the 2021 budget – though the fiscal year begins in scarcely six weeks. A malaise has taken hold in the halls of power, a paralysis that has nothing to do with the pandemic, and has been developing since long before it struck. It now threatens to undermine any efforts to restore normalcy and prosperity in COVID’s wake.
It begins in the Health Ministry, whose top economists and epidemiologists have left, and are not being replaced.
Israeli media noted last week’s dramatic resignation of Itamar Grotto, the senior deputy director-general of the ministry, an epidemiologist by training and a key point man in the government’s pandemic fight. But Grotto is only the latest to jump ship. The ministry has been shedding its top officials for a year and a half and has replaced none of them.
Economist Nir Keidar was the deputy director-general for strategic and economic planning until he left in May 2019, after 13 years on the job. Eighteen months later, his position is still vacant.
So is that of the deputy director-general in charge of hospitals, who left in August for a post at Rambam Hospital in Haifa; or his deputy, the chief overseer of government hospitals, who left that same month to return to his previous job running Poriya Hospital in Tiberias; or the deputy director-general for regulation, computing and digital health, who left in June to become the chief financial officer of the Maccabi health fund; or the deputy director-general for oversight of the health funds, who left in September last year and has still not been replaced 14 months later; or the deputy director-general in charge of planning and developing health facilities, who announced his resignation in August to take up a post at Ichilov Hospital in Tel Aviv. Even the ministry’s spokesman left last month, and many other senior officials are said to be contemplating doing the same.
None has been replaced.
There comes a tipping point for any institution facing such an exodus. As the ministry struggles to battle the pandemic, the officials responsible for nearly all other vital functions, from budget planning to the oversight of hospitals and health funds, have been fleeing for better pastures. Since the ministry cannot stop carrying out those functions, the workload falls, untenably, irresponsibly, on those who remain.
Last week’s resignation of Grotto and Sunday’s reported resignation of deputy director-general for finance, Vadim Ferman, brought the problem squarely into the orbit of the pandemic fight. Grotto serves as the country’s de facto top epidemiologist, while Ferman was in charge not only of the ministry’s budgeting, pricing, and financial planning division, but also of the 16 billion shekels ($4.75 billion) in funds handed to the ministry for its pandemic efforts.
Where’s an accountant when you need one?
The government has spent some NIS 64 billion (some $19 billion) on the pandemic thus far, according to Finance Ministry figures released last week, an expenditure that pushed the overall government spending this year by some 20% over last year, driving an unprecedented 12-month deficit of some NIS 137 billion (over $40 billion).
Massive bank-breaking spending in the middle of a once-in-a-century crisis may be wholly justified. But Israel has a problem: to finance that deficit, the government will have to borrow a lot of money from financial institutions abroad, and there is no one who can do that right now in the state apparatus.
The Finance Ministry’s accountant general, by law the only official allowed to issue bonds, retired at the start of this month.
Like the Health Ministry, the Finance Ministry has also been shedding senior officials amid the political deadlock and budget freeze. It lost its director-general and budgets chief in recent months, as well as three of the budgets department’s five deputies and other top officials.
But the loss of ex-accountant general Roni Hizkiyahu, a venerated eminence grise of the Israeli financial world who has served as the Bank of Israel’s chief banking regulator and as a chairman of a major commercial bank, is especially painful.
It’s not just that Hizkiyahu’s deputy also resigned last month; it’s the position itself. The accountant general has unique powers and independence, all set down in law.
The accountant-general alone may waive the legal requirement for a tender for a government contract. The accountant-general alone issues bonds or handles borrowing negotiations. It is the accountant general, in other words, who is uniquely empowered to cut through a great deal of Israel’s slogging bureaucracy to bolster the pandemic fight, and then raise the capital needed for that fight in the global financial markets.
Grasping the vital need for a fully-functioning accountant general’s office, Finance Minister Israel Katz announced last month that he had selected Yaheli Rotenberg, a grizzled veteran who has served at all levels of the accountant general’s office and has experience with bond issues abroad, as the country’s next state accountant.
But Katz cannot carry out the appointment. Netanyahu has issued a de facto freeze on all appointments of senior officials in Blue and White-controlled ministries – especially the Justice Ministry – and Defense Minister Benny Gantz has responded by refusing to allow a cabinet vote on appointments in Likud-led ministries like health and finance. (That standoff is the cause of many unfulfilled posts, but not all. In many cases, simple mismanagement is to blame. Many of the unfilled posts in the Health Ministry have had tenders issued to hire replacements – but the tender committees have not met for months.)
And so a country with a spiraling deficit in the midst of a pandemic and repeated nationwide lockdowns, with a Health Ministry quickly emptying of its top experts and most of its senior planners, and a Finance Ministry shedding senior staff amid an economic downturn – cannot even appoint a state accountant to raise the money it needs to see the state through the crisis.
Reality always catches up
It can be hard to follow the labyrinthine ins and outs of Israel’s state bureaucracy. In the current crisis, it has become more vital than ever to do so. It is in the details that the dangerous fecklessness of the country’s current political leadership becomes visible.
Netanyahu has been able to coast along thus far, refusing to pass a state budget and endlessly butting heads with Blue and White in a bid to ensure he never has to fulfill the rotation deal he committed to last May. He has blamed all the pain and economic harm on the pandemic itself, insisted that his own management of the long crisis has been a world-leading success story, and managed to duck most of the blame from most of his supporters.
But reality eventually catches up to the political narrative.
S&P’s assessment assures investors that by mid-2021 – by which time a vaccine will likely be available and widely distributed – Israel’s government will return to its longstanding policy of fiscal responsibility. That is, S&P’s forecast is in part betting that Netanyahu will begin slashing the special grants and stipends that have kept a million Israeli households afloat since the start of the pandemic – right in the middle of an all-but-inevitable election campaign.
A strong professional bureaucracy and a fundamentally healthy economy – an economy strengthened by the efforts and policies of Netanyahu himself over many years – have tempered the pain from the pandemic and would, in other times, surely see Israel through to a robust recovery. But Israel’s never-ending political crisis now threatens to gut that very bureaucracy and wreak populist havoc with that economy. By the time that becomes clear to overseas analysts, it may be too late for Israelis. The damage will have been done.
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