The economic impact of the coronavirus pandemic will be felt for a long time and is likely to increase poverty levels and worsen inequality, two facets of Israeli society that were “exceptionally high” even before the crisis hit, a report by the Taub Center for Social Policy said.
The incidence of poverty is estimated to have increased by about 8 to 14 percent and inequality by about 1.5 to 4 percent in 2020 as a result of the pandemic, wrote the authors of The State of the Nation 2020 report. The main victims of the crisis were working families who saw their jobs disappear or their salaries cut, single-parent families, and young families.
In terms of employment, the coronavirus crisis has affected different groups of workers in different ways. More women than men were affected, due to women’s large presence in ancillary education professions such as teaching assistants and instructors, many of whom were put on unpaid leave as schools were shuttered. Also, more women than men took unpaid leave to stay home with their children whose schools were closed.
Especially during the early months of the pandemic, the highest rate of unemployment was among low-wage workers and those with relatively low levels of education. Two other groups that were severely affected by the crisis were those close to or beyond retirement age, and young workers.
During the first months of the crisis, the rise in the broad unemployment rate was steeper among young people aged 18 to 29 and among older workers aged 65 to 74 than among those ages 30 to 64, the report said. The definition of broad unemployment includes unemployed people and those furloughed, for reasons associated with the crisis, as defined by the Central Bureau of Statistics.
One of the explanations for the strong impact of the pandemic on the employment of older people is that they are likely to belong to a health risk group.
“The longer the crisis persists, the greater the probability that many of the workers in this group, some of whom continued to work beyond the official retirement age, will leave the labor market permanently,” the report said. If this scenario transpires, the labor force in Israel may lose workers who would have otherwise continued to work for several more years had it not been for the crisis, and this will impact the nation’s economic growth and productivity levels.
In the Haredi sector, the crisis seems to have had a “relatively severe impact” on the employment of men, a group whose employment rates were already low, the report said, while the Arab Israeli sector “also sustained a relatively severe impact.”
The business sector was hit harder by the pandemic than the public sector, and there are indications of a “severe impact” on the self-employed, the authors of the report said.
The number of recipients of unemployment insurance benefits grew more than elevenfold, from about 70,000 prior to the crisis to about 900,000 in April 2020, the report said.
Accordingly, the total cost of unemployment insurance benefits during the first half of 2020 rose to about NIS 9 billion and benefits paid in May alone were larger than the total for all of 2019, the report said.
During the first three quarters of 2020, Israel’s gross domestic product (GDP) dropped by 3% relative to the same period in 2019.
According to a Bank of Israel forecast, the decline in GDP during 2020 will be 4.5–5%. Given an annual rate of population growth of 1.9 percent, “this implies a drop in GDP per capita of up to 6.9%, which will set Israel back about six years,” the authors of the report said.
According to the Bank of Israel’s more optimistic forecast — if the pandemic is brought under control soon — GDP is expected to grow by 6.5% percent in 2021, which implies that even at the end of 2021 GDP will be lower by about 5% than what was expected without the crisis, and GDP per capita will be at its 2017 level, the report added.
The crisis has also led to a plunge in tax revenues and an increase in the government’s budget deficit. In 2019, the deficit reached 3.7 percent of GDP, which was significantly higher than the target for the year (2.9 percent). At the end of the third quarter of 2020, the cumulative deficit had already reached 12 percent of cumulative GDP for the year, which is quite close to the Bank of Israel’s forecast of 13 percent for the year.
Meanwhile, the national debt as a percentage of GDP is expected to balloon to 76% in 2021, according to Bank of Israel estimates, if the pandemic is under control, and to a high 83% in a more pessimistic scenario.
“This means that after the crisis, the government will have to quickly reduce the deficit and encourage growth in order for the debt-to-GDP ratio to return to its pre-crisis level” of around 60%, said Professor Benjamin Bental, head of the Economic Policy Program at the Taub Center, in a statement.
“Currently, the situation of our national debt is much better than that of many other developed countries and our interest rate environment is very favorable,” he added. “At this stage, the Israeli economy enjoys a high level of confidence from the global capital market, as can be seen in the premium paid on the government of Israel’s debt and its high credit rating. Nonetheless, it should be noted that improper management and poor utilization of funds is liable to quickly change this situation.”
When formulating policies for the future, the government must take into account the gaps that exist in terms of impact sustained by the workers, addressing each group with appropriate steps.
“There is room for concern that workers who stopped working for an extended period may lose hope and not attempt to re-enter the market,” the authors wrote. “As a result, the Israeli economy will lose workers who, were it not for the crisis, would have continued to work. This point is particularly important in the case of older workers.”
The current crisis, however, also presents opportunities: the vast number of dismissals among low-wage workers opens up a chance to improve their level of training and thus their wages.
In addition, an expansion of technologies that allow for work from home could boost employment prospects and the ability of firms to access high-quality workers among a more diverse pool of people, the report said.
The government’s economic program to deal with the crisis in 2020 totaled about NIS 139 billion as of end November, which constitutes about 10 percent of the GDP in 2019, the report said, based on Finance Ministry data.
The overall utilization of this budget for the months March to November is 73%, “which is behind schedule,” said Dr. Labib Shami, one of the authors of the report, in the statement. The underutilization in certain programs, like budgets for vocational training programs or those to ensure business continuity and plans to ensure future economic growth, “is liable to harm the economy’s potential for recovery.”