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Setting budget is ‘most pressing challenge’ for new finance minister: Moody’s

Investor service sees government’s ‘lack of ideological cohesion’ as incentive for it to focus on economic policies

Shoshanna Solomon is The Times of Israel's Startups and Business reporter

Israel's new Prime Minister Naftali Bennett (C) after the swearing in of the new government, in the Knesset on June 13, 2021. (Olivier Fitoussi/FLASH90)
Israel's new Prime Minister Naftali Bennett (C) after the swearing in of the new government, in the Knesset on June 13, 2021. (Olivier Fitoussi/FLASH90)

The most pressing challenge for Israel’s new Finance Minister Avigdor Liberman will be to draw up a new budget for the nation, its first since 2019, Moody’s Investor Service said Monday in a note, after Israel swore in a new government led by Naftali Bennett on Sunday, ousting premier Benjamin Netanyahu after 12 years at the helm.

“The budget will offer clues on whether the new government is able to elaborate and implement an effective post-crisis fiscal strategy that would target eventually returning the debt burden to its historic downward trend,” Kathrin Muehlbronner, a Moody’s senior vice president, wrote. “Pent-up spending pressure in a number of areas, including health, infrastructure and defense, make it likely that any future deficit-reduction strategy will need to rely in part on revenue measures.”

The new budget will likely be biennial, covering 2022 and the remainder of 2021, she said.

The new government, made up of a coalition of left-wing, centrist and right-wing parties and one Arab party, “is likely to result in a fragile and potentially short-lived government,” wrote Muehlbronner. But this “lack of ideological cohesion” is expected to “to increase incentives to focus primarily on economic policies rather than more divisive issues.”

Internal consensus in the new government “will be difficult to achieve on many issues, including foreign policy and the approach to the Palestinian territories,” Muehlbronner wrote. “Still, there is a broad consensus among the mainstream political parties on the basic tenets of economic and fiscal policy; we expect the government to focus primarily on these issues as the economy and labour market continue to recover from the coronavirus-induced shock.”

In May, Israel’s fiscal deficit, which was already high before the pandemic, was 10.5% of GDP.

“We expect the general government deficit to narrow to around 8% of GDP by the end of the year, in line with the strong economic recovery” and as pandemic-related fiscal support measures expire, Muehlbronner wrote. Moody’s forecasts 2021 real GDP growth of 4.7%

Israel’s debt burden is expected to continue to rise in the coming years to around 80% of GDP by 2024, from 60% of GDP in 2019, according to Moody’s, “indicating that the coronavirus-induced shock will have a lasting effect on the government’s fiscal metrics. By contrast, we expect the economic and fiscal effect of the recent heightened Israel-Gaza conflict to be limited.”

At a meeting of his Yisrael Beytenu faction on Monday, Liberman said that “there will be no tax increase” and that the new government’s aim is to manage a “responsible” state budget, Calcalist reported.

Liberman is scheduled to meet Monday with the governor of the Bank of Israel, Amir Yaron, the chairman of the Histadrut, Arnon Bar-David; the president of the Manufacturers’ Association, Ron Tomer; and the president of the Israel Business sector, Dovi Amitai.

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