The war hit Israel’s budget

While Israel’s war against Hamas costs the economy approximately $260 million each day, payments to ultra-Orthodox schools and coalition funds in the new budget that Finance Minister Bezalel Smotrich will announce in a few days have caused a national debate.

Israel’s spending program includes “coalition funds,” or discretionary spending allocated to the five parties that make up Netanyahu’s government, the most religious government in Israel’s history. Part of the record 14 billion shekel ($3.6 billion) budget approved last May will go to religious schools, some of which are exempt from courses such as English and mathematics. Other pet projects include the development of Jewish settlements in the occupied West Bank.

Record-breaking funding for religious programs and settlements in the West Bank was called into question long before the war devastated the $520 billion economy, and experts warned it would depress growth. However, Netanyahu had pledged to pay any economic price the war inflicted on Israel.

Although the special allocations represent a small fraction of the total budget for 2023-2024, they have become a sign of competing priorities at a time when Israel faces its worst armed conflict in half a century.

What happens with the coalition funds will influence the markets: according to estimates by the Ministry of Finance, the war will cause economic damage of around $8 billion. The amount of coalition funds that have not yet been used is almost NIS 8 billion.

“As long as the government hangs on to coalition funds, it will pay more for its debts,” said Rafi Gozlan, chief economist at IBI Investment House.

THE BUDGET DEFICIT INCREASED MORE THAN 7 TIMES

The budget deficit rose more than sevenfold in October from a year earlier as the government increasingly turned to bonds to cover war costs. The Finance Ministry announced that it plans to borrow 75 percent more in November than last month.

The 2023 budget plans outlined by Smotrich call for a spending increase of 35 billion shekels, much of it debt-financed and earmarked for the military.

Despite his promise to eliminate non-essential expenditures to support the war, Smotrich proposed eliminating less than the Finance Ministry’s budget department had recommended.

Smotrich said the budget deficit could reach 4 percent of economic output this year and 5 percent in 2024. That figure is more than double the government’s previous estimates, but still lower than the 7.1 figure. percent estimated by Moody’s Investors Service.

‘UNNECESSARY FINANCES’ WARNING FROM 300 ECONOMISTS

The government’s stance drew criticism from investors and many high-level analysts. In a letter sent to Netanyahu and Smotrich last week, 300 leading economists from Israel and abroad warned Netanyahu and Smotrich.

The letter, signed by names such as Nobel economics laureate Josh Angrist, said: “A fundamental and necessary step would be to stop funding everything that is not necessary for the war, especially coalition funds.”

The picture is worsening after a brief period last year in which Israel ran a budget surplus for the first time since at least 2000 and military spending declined for the first time in more than a decade.

From shekels to bonds, Israeli assets have recovered most, if not all, of their losses following the Hamas attack. However, an atmosphere of risk still prevails over government debts.