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Inside Story'There is no manna coming from the sky'

The kids are not alright: Next generation will foot massive pandemic bill

While acknowledging that money, and lots of it, must be devoted to safeguarding the economy, experts rail against unwise and profligate spending and warn of the heavy toll to come

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

Illustrative photo of young Israelis at a cafe in Tel Aviv (photo credit: Miriam Alster/Flash90)
Illustrative photo of young Israelis at a cafe in Tel Aviv (photo credit: Miriam Alster/Flash90)

Amit is a 28-year-old computer science student at the Hebrew University of Jerusalem entering his last year of studies. He is already working for a Tel Aviv-based startup as an intern Java developer. Since the nation went into coronavirus-related lockdown he has been working from home, where he lives with his girlfriend, an economics and accounting student.

His cousin Elad, 26, who is also studying computer sciences at the Hebrew University and is a year below Amit, is somewhat less fortunate. This is the year he is supposed to start an internship at a tech firm, but the prospects don’t look good, he told The Times of Israel. Tech firms are hiring fewer interns because they are not promoting junior workers to senior levels, to keep costs down. Some interns who were supposed to take up junior positions, freeing up space for newcomers, are now staying on in internships just to keep their jobs.

Little did Amit and Elad know at the start of their studies that the coronavirus pandemic would shuffle their whole deck of cards — their classes have moved online and their job prospects are not as bright as they were. Still, they will probably be luckier than most, because the tech field is still considered hot in the so-called Startup Nation.

Worst of all, though, they probably never imagined they would end up footing the largest chunk of the coronavirus bill — the billions of shekels the government is spending to help citizens survive the pandemic-induced economic crisis.

Amit, a 28-year old computer sciences student, in 2018 (Courtesy)

“I am sorry for those who are at the start of their work careers,” said Elise Brezis, professor of Economics at Bar-Ilan University. The tax burden they will be paying will be higher than those of the generations of workers before them, she said.

Higher debt can affect economies for more than 20 years, she warned. And payback time will come when the economy starts to grow again.

“Their taxes will start to increase in a few years to pay back our deficit today, because we have to understand that there is no manna coming from the sky,” Brezis said.

“We, our children and grandchildren, and maybe their children too,” will have to deal with the debt derived from the government’s economic policy during the corona crisis, said Daphna Aviram Nitzan, the director of the Center for Governance and the Economy at the Israel Democracy Institute.

Israel, the only country in the world that has imposed a second nationwide lockdown, could face an additional loss of NIS 35 billion ($10 billion), the Finance Ministry estimated.

After emerging fairly quickly from a first lockdown imposed in the spring, the country had to shut down again in September as infection rates surged to record levels. As of October 7, Israel had registered 30,593 cases per million people, counting among the highest rates in the world, ahead of Brazil, with 23,124 confirmed cases per million, and the United States, with 22,179 confirmed cases per million, according to the WHO Coronavirus Disease dashboard. Israel also led the world in daily fatalities per capita, as of October 3.

Magen David Adom paramedics in protective gear bring a patient suspected of having COVID-19 to the coronavirus unit at Sheba Medical Center at Tel Hashomer on July 8, 2020. (Flash90)

To cushion individuals and firms against their loss of income, with large swaths of the economy forced to shut down, the government set out a spending package of some NIS 100 billion and liquidity measures such as loan guarantees and tax payment deferrals.

The main measures included broadened eligibility for unemployment benefits; grants for firms to rehire furloughed workers; direct payments to groups such as the elderly, families with children and the self-employed; and a temporary cut in property taxes and subsidies for small firms to cover their businesses’ fixed costs.

The Bank of Israel set up plans to buy government and corporate bonds and created a credit facility for small businesses via the banks. It also reduced the capital adequacy ratio for banks, to ensure they continued lending.

Israel is doing the right thing in spending all this money to save the economy and help its citizens during their time of need, said Brezis, just as all nations have been doing. But spending that money should be done wisely and thoughtfully.

“You don’t have a choice,” she said. “It’s like when you have a sick person at home. You accept the need to go to the doctor and pay the bill now and this is going to be at the expense of your vacation in two years. So, what we did is OK. But there is a price to it and therefore we cannot keep increasing the expenses today, because it is not a gift from God. It is coming from the next generation.”

Elise Brezis, professor of Economics at Bar-Ilan University (Courtesy)

The government has come under fire for its lack of economic leadership throughout the pandemic: the aid provided initially was too little, and what came in the end came too late. Politics, infighting among coalition partners and lobbying from pressure groups are seen to be hobbling the nation’s economic recovery, and critics have decried the lack of a clear program to climb out of the freefall.

In July, the government funneled NIS 6 billion in handouts to nearly all Israelis, with the exception of certain high earners, in a bid to jumpstart the economy.

Spending that money, Brezis said, was like splurging on a “very expensive meal” when you have a limited budget instead of spending it on something more useful, like buying computers for your children. “You will have to pay that amount back in 10 years, so was it the best way to spend money?”

Prime Minister Benjamin Netanyahu, left, chairs an emergency meeting of senior ministers to decide on measures to curb the spread of the coronavirus, July 16, 2020. (Chaim Tzach/GPO)

This second lockdown has brought the number of furloughed and unemployed workers once again to almost 1 million, as in the first wave of closures. According to the Israel Employment Service some 200,000 Israelis have been furloughed, or put on unpaid leave, since September 17, as the second lockdown came into force. As of October 7, there were a total of 950,989 Israelis seeking work via the Employment Service, of whom 606,899 were on unpaid leave.

Because of the second lockdown, the worst-case scenario set out by economists is likely to kick in.

The Bank of Israel’s Monetary Committee in August forecast that under a pessimistic scenario in which only partial control of the pandemic is achieved, the economy will contract by 7 percent this year, with the government budget deficit and debt to GDP ratio ballooning to 14.6 percent and 78% respectively. In 2021, the debt to GDP ratio is expected to rise even further, to 87%, the central bank forecast. A low debt-to-GDP ratio indicates an economy that produces and sells goods and services sufficient to pay back debts.

This compares with a GDP growth of 3.4% for 2019, a budget deficit of some 3.9% that year and a debt to GDP ratio of some 60%.

It must be remembered that Israel entered the crisis in better economic shape than many; even if its debt to GDP ratio does balloon to almost 80% this year, it will still be lower than that of other nations. In France, for example, the ratio could reach 115% by year end, according to forecasts, and in Japan that figure could be well above 240% , according to Fitch Ratings.

“This gives us a big advantage of course, because we have less of a problem than other countries,” said Brezis.

No plan, no budget

What is more worrying, said IDI’s Aviram Nitzan, is that there is no clear plan going forward. “The government is not taking steps to stimulate the economy,” she said. “There is a huge increase in the debt to GDP ratio, and there is no end in sight. And if the government doesn’t act today to increase future growth, the debt to GDP ratio will only get bigger and bigger.”

Without economic growth, revenues from taxes shrink, and the budget deficit will increase further.

In order to move from recession to a growth phase, the government should immediately start “planting the seeds for future growth,” she said. “It is not enough to give money for those affected by the crisis. You must do something to enable growth, and that is not happening. That is what worries me.”

Daphna Aviram-Nitzan, director of the Center for Governance and the Economy at the Israel Democracy Institute (Courtesy)

The fact that Israel, weighed down by political considerations, has not yet passed a budget for 2020 and 2021 is a barrier to economic growth. “Only after they approve the budget can the government start spending in infrastructure investments, stimulate businesses to invest in research and development, and invest in green infrastructure,” steps that will help boost economic growth. “If we don’t do that now, we will lag behind other economies.”

In order to be able to finance the increased debt, the government will have to increase tax rates once the economy grows again, she said. That could be once the coronavirus is phased out, probably in 2022, she said. “It will be hard,” she said. People just recovering from the loss of their jobs or the closure of their business will have to start paying more taxes, along with repaying any loans they took during the current crisis.

“It is going to be very challenging,” she said. “And the people who will pay the most are the people who are now entering the labor market — the younger people.”
A government that must repay high debt may be less generous in spending on its citizens, and may have to cut welfare payments, pensions for the elderly, and health and education spending.

“If in one year we increased the debt to GDP ratio from 60% to 80%, it won’t take one year to bring us back to the 60%. We will need many more years to go back to the place we were before the coronavirus. You cannot double the tax rate; you can increase it only by a few percentage points because people must be able to recover and live on something. So, it will be a very slow process to decrease the debt burden.”

The government will have to manage its budget more efficiently, so as not to hurt the quality of the services it provides its citizens, such as health and education, she said.

“It depends what the government will do,” she said. ” If they will put more money to stimulate the economic growth, invest in infrastructure, invest in R&D, improve the education and training system, and invest in other growth engine activity, then the recovery stage will be sooner and faster, the debt to GDP ratio will improve, and the situation in the labor market will get better faster.”

Meanwhile, 28-year old Amit, who served in the army for three years before starting university, says that he believes he and his girlfriend “will be OK.”

“We work and study in fields that are stable, even during the time of corona,” he said. “But I am worried about the direction the country is going, both economically and with regard to the deep divisions among the people.”

The 26-year old Elad, who immigrated to Israel from the UK in 2012 and served in the army before starting his university studies, said he is prepared to take on the burden of higher taxes in the future if that means that families today can get the economic help they need to get them through the crisis.

The pandemic is a “once in a generation event, or even more than one generation,” he said. “There is not much the government can do. I am at peace with paying more taxes if the families get the help they need. But it seems that the government is not doing such a great job in distributing the funds, the money is not being used in the best way.”

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