New budget bill shows coalition launching sweeping reforms despite fragility

The Bennett-Lapid government is advancing a host of major long-delayed reforms with unexpected ease. Is its very instability the secret to its resolve?

Haviv Rettig Gur

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

Prime Minister Naftali Bennett, center wearing black mask, during a cabinet meeting at the Foreign Ministry in Jerusalem on July 25, 2021. (Marc Israel Sellem/Pool)
Prime Minister Naftali Bennett, center wearing black mask, during a cabinet meeting at the Foreign Ministry in Jerusalem on July 25, 2021. (Marc Israel Sellem/Pool)

For nearly forty years, an Israeli state budget has always come into the world in two parts. One half of the budget is a bill with all the numbers: endless columns of projected income vs. expenditures, drilled down to each agency and program.

The other half is known only by the clumsy name Hok Hahesderim, or the “Arrangements Law.” This bill runs to a few hundred pages of dense prose delineating the many structural, institutional and policy reforms needed to make the numbers in the other bill work.

When Israelis speak of a “state budget,” they’re referring to the two bills in tandem: The hard numbers and their institutional and policy consequences.

Drawing up the Arrangements Bill is a dry, complex, highly bureaucratic process usually ignored by the press and most lawmakers. And that’s a mistake, because no other text — no other bill, no coalition agreement, no political speech — offers a clearer window into an Israeli government’s true priorities and intentions.

The Arrangements Bill must pass for the state budget to pass, and a state budget must pass if the government wishes to avoid the snap elections mandated by law when the budget vote fails. So no coalition that wishes to survive can afford to vote against the Arrangements Bill, a fact that has transformed it into a convenient omnibus vehicle for anyone who wants to ensure a piece of legislation passes into law.

All of which brings us to the current Arrangements Bill, which is set to face its first vote in the cabinet on Sunday.

Foreign Minister Yair Lapid, left, and Prime Minister Naftali Bennett seen in the Knesset, July 26, 2021. (Yonatan Sindel/Flash90)

It’s an extraordinary document, believed by Finance Ministry officials to be among the most complex arrangements bills ever, running with its appendices to roughly 400 pages.

Part of that length is a function of the unprecedented 3.5 years since the passage of the last Arrangements Law in March 2018. No state budget was passed since then because of the two-year political crisis that began the following year.

But there’s a more basic reason for the bill’s length. It includes the largest collection of major policy reforms in memory, reforms that few in the public service believed they’d see passed in their lifetimes.

It’s an irony that highlights the strange new rules of this unprecedented government: Perhaps the most fragile coalition in Israel’s history, holding the narrowest possible Knesset majority and straddling deeply fraught political fault lines, is now set to advance some of the boldest reforms in a generation.

Competitive kashrut

The reforms include a deep restructuring of the state kashrut system, a closed monopoly long protected by the Haredi parties Shas and United Torah Judaism which has become a breeding ground for petty corruption and a source of endless frustration for Israel’s food and hospitality industries.

Kashrut supervisors inspect the “Bikurey Hasade” fruit distribution plant on March 20, 2016. (Yaakov Naumi/Flash90)

The new system, championed by Religious Affairs Minister Matan Kahana, would break the rabbinate’s supervision monopoly, allowing private kashrut companies to form and provide supervision, with the state rabbinate setting the overall kashrut standards. Each company would have to publicize the specifics of its kashrut standards, and a company that wanted to offer a more lenient standard than the rabbinate’s would be allowed to turn to any three municipal rabbis for permission to do so.

An opaque, famously dysfunctional religious bureaucracy will, Kahana hopes, be replaced by a thriving free market of competing supervision providers, with business owners and consumers ultimately crowning the winners through market forces.

It’s the kind of reform few would have believed possible until, all of a sudden, there it was, fully developed and written into the Arrangements Law.

Cheaper eggs

Then there’s the reform of the agriculture industry being advanced by Agriculture Minister Oded Forer and Finance Minister Avigdor Liberman.

Israel’s agriculture sector has long been one of the most protected and protectionist industries in the country, a relic of Israel’s socialist past that survives largely because of concerns among defense strategists that ending massive subsidies and protections for farmers could shrink Israeli food production and leave the country unable to feed itself in a possible future wartime blockade. The result has been a regime of government-imposed quotas across the whole range of agricultural produce, from eggs to avocados, meant to prevent a glut in the market and ensure farmers stay financially solvent.

Workers harvest broccoli in a field in the Jezreel Valley on February 2, 2018. (Anat Hermony/Flash90)

The new reform would steadily weaken those quota restrictions and, crucially, ease the draconian limits now in place on importing fresh produce from abroad. It would streamline imports by adopting European standards for many produce categories. The plan also comes with a generous package of government grants for upgrading farms and infrastructure, including new tax breaks to encourage commercial investment in the agriculture sector.

But it has faced vehement opposition over the past week from farmers and farming lobbies who fear the new competition. That kind of resistance has for decades doomed attempts at reforming the agriculture sector. No longer.

Finance Ministry projections say the reform is expected to save Israeli consumers some NIS 2.7 billion ($830 million) annually on their grocery bill. The price of eggs is expected to drop by some 25%, according to government figures.

The lifting of import restrictions has another upside, officials said. Some seasonal produce like nectarines will become available year-round, instead of in the narrow window of the Israeli summer harvest. New items, such as berries that do not grow in the Mediterranean basin, will become available for the first time in Israeli supermarkets.

Import with ease

A sweeping reform of Israel’s Standards Institute pushed by Economy Minister Orna Barbivai may be the most dramatic of the lot.

Economy Minister Orna Barbivai at the Economy Ministry in Jerusalem on June 14, 2021. (Sraya Diamant/Flash90)

The institute is the official body that grants safety certification to products in the Israeli market. It has also long been one of the bottlenecks raising the costs of most consumer products in the Israeli economy. Unlike in much of Europe and North America, Israel’s Standards Institute maintains a unique Israeli standard for safety and functionality for countless products, from toothpaste to furniture to televisions to food.

That means that importers to this small market cannot rely on standards certifications they may have received from the United States or European Union; to sell their product to little Israel, they must undergo a whole new process of safety checks and verification. It also means that products must be checked at the ports as they are brought into the country; certification from abroad isn’t enough to approve entry. That added bureaucracy can mean shipping containers often wait for weeks at the ports as the products inside are tested.

The Israeli system is no accident; it was constructed in a deliberate effort to raise the cost of imports and offer local industries protection from foreign competitors. And it’s part of the reason that consumer goods in Israel cost on average 30 percent more than in other OECD member states, with an even larger gap when it comes to packaged foods and toiletries.

The new reform is as sweeping as its appearance in the Arrangements Law was unexpected: Instead of the traditional Israeli cargo checks at the ports, the Standards Institute would permit entry to products with recognized international certification. The port checks would be replaced by a system of surprise safety checks in stores. In other words, Israel will adopt the basic regulatory standards currently in force in the US and EU. Imports will arrive unhindered, new importers will enter the market, and prices on store shelves will, Barbivai hopes, dip toward EU levels.

Ashdod Port workers unload a container with millions of eggs imported from Spain, at Ashdod Port on April 5, 2020. (Flash90)

There’s so much more in the Arrangements Bill: A tax on sugary drinks intended to rein in skyrocketing sugar consumption and an accompanying four-fold rise in diabetes over the past two decades; a steep tax on disposable plasticware that will double its market price in an effort to disincentivize its use; a first-ever fee for entering the Tel Aviv metropolitan core with a car during rush hour; and on and on.

Fundamental reforms

These reforms share one characteristic: All have been advocated for many years, but could not advance due to resistance from industry groups, government agencies or various political factions. Haredi parties stood in the way of taxing sugary drinks and plasticware, while farmers’ and manufacturers’ lobbies resisted the agriculture and import reforms.

But what explains the sudden uncorking of all that resistance all at once? It isn’t the personalities involved: The reforms are being pushed by different ministers from a broad cross-section of parties.

It may, in fact, be a result of the Bennett-Lapid government’s fragility and instability.

Prime Minister Naftali Bennett, center, Foreign Minister Yair Lapid, 2nd left, Defense Benny Gantz, left, and Finance Minister Avigdor Liberman, right, seen during a plenary session in the Knesset, July 26, 2021. (Yonatan Sindel/Flash90)

The past 12 years of Benjamin Netanyahu’s rule were marked by tight control over the cabinet and the coalition. New initiatives and controversial reforms were reined in; fewer initiatives meant fewer destabilizing fights. Stability was paramount, so nothing that could cause dissension within the coalition was allowed to advance. No one even contemplated reforms to the state religious bureaucracies as long as Haredi parties were in the coalition. Wherever possible, domestic policy was farmed out to relevant interest groups.

So it was that 12 years of Netanyahu’s rule saw a great deal of government attention given to Iran, the Palestinians and other geopolitical concerns, but relatively few significant reforms dealing with the daily needs of ordinary Israelis. Despite the 2011 cost-of-living protests, the cost of living wasn’t seriously addressed in the ensuing years.

The prioritizing of stability drove the government to inaction. Inefficient bureaucracies and state religious monopolies went unaddressed. Economic bottlenecks like the Standards Institute went unchallenged.

That logic has now reversed itself in the new government — not because Naftali Bennett is more devoted to reforming old, inefficient bureaucracies than his predecessor was; indeed, not because of Naftali Bennett at all.

The new government’s ability to advance bold reforms comes not from its leader, but from its lack of one. No single politician dominates this coalition as Netanyahu did its predecessors. It’s a government keenly aware that any of its member factions could topple it at any moment. It is in that sense a more egalitarian cabinet than any in Israel’s history. Bennett and Yair Lapid must cajole and convince; they have too little parliamentary wiggle room to demand or punish.

Prime Minister Naftali Bennett chairs the weekly cabinet meeting in Jerusalem, June 27, 2021. (AP Photo/Maya Alleruzzo, Pool)

That simple fact of political math has granted every party chief and cabinet minister in the new coalition unusually broad authority over the policy realms handed to them by the coalition agreements.

Liberman’s and Forer’s agriculture reform is their own, and no one in the cabinet has a meaningful ability to stop it except by appealing to their goodwill. The same is true of Barbivai’s import reforms and Kahana’s kashrut reforms — each is master of their domain.

And, of course, the coalition’s fragility makes each minister and faction all the more eager to be seen achieving major victories quickly. In the past, Finance Ministry reform proposals often encountered skeptical ministers armed with counterarguments supplied by lobbyists and interest groups. Those same treasury officials are now encountering ministers eager for new initiatives and ways to leave their mark.

Finance Ministry officials have been walking the halls of the ministry’s Jerusalem headquarters this week with an air of one bewildered by unexpected good fortune.

At the government’s swearing-in last month, pundits suggested that hovering permanently at the edge of a political precipice would make the new ministers timid and the government unassertive. If the Arrangements Bill is any indication — and it is — life on the edge has had the opposite effect.

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