(Bloomberg Businessweek) -- Inflation and unemployment are climbing, and gross domestic product is contracting, so tough measures are on the agenda. Israel’s finance minister slashes state subsidies for ultra-Orthodox men and tells them they can no longer spend their days in seminaries studying rabbinical texts. They need to find jobs. Jewish settlers in the occupied West Bank will lose tax benefits, he adds. The crisis requires all Israelis to sacrifice and contribute.
That might sound like something a sensible official today would say. As Israel closes in on a year of war in Gaza, it faces lowered credit ratings, falling exports and the risk of an even deeper economic slump. But those words weren’t uttered recently by anyone in government. They emerged from the lips of Benjamin Netanyahu when he was finance minister 21 years ago as he slashed spending, sold off state-controlled companies and helped turn Israel into a high-tech investment magnet, propelling it into the stratosphere of global wealth.
That was then. Prime Minister Netanyahu is doing things differently now, inflating public spending in what many consider an unsustainably expansive fiscal policy. The ultra-Orthodox and West Bank settlers are not only his core constituencies but also pivotal partners in his governing coalition. Balancing the budget by squeezing them could be political suicide. But if there’s no budget by March, the government, by law, ceases to exist. So as the budget struggle intensifies, it offers a lens through which to view Israel’s escalating crises over security, prosperity and identity.
The war with Hamas is far from over; threats and battles abound from Lebanon, Yemen and, especially, Iran; and the Palestinian West Bank is seething. The government has been paying hundreds of thousands of salaries to military reservists as well as hotel bills and housing subsidies for tens of thousands driven from their homes near the northern and southern borders. Relations with the US—where a presidential election looms and support for Israel is weakening—could deteriorate further.
Beginning in late August, Israel had one of the stormiest stretches in recent memory. Six Israelis who’d been held hostage by Hamas since last October were discovered executed in a tunnel deep under the southern Gaza city of Rafah. Hundreds of thousands of citizens took to the streets in anguish and anger at Netanyahu for his failure to obtain a cease-fire that could have brought the hostages home. Such rallies continue weekly, and part of Israelis’ rage is fed by the sense that if Netanyahu hadn’t brought Finance Minister Bezalel Smotrich and National Security Minister Itamar Ben Gvir into his coalition, a Hamas deal would have already been signed. The two ministers, both hard-right West Bank settlers, not only reject yielding any territory to Palestinians, they also oppose any compromise over the war against Hamas, even to bring back the remaining hostages. They’ve repeatedly claimed that if their red lines are crossed, they’ll walk out of the government. On a deal with Hamas, Smotrich said recently: “I very much want to get the hostages back, but I’m not prepared to commit collective suicide for it.”
Against this backdrop, on Sept. 3, Smotrich offered the outlines of his proposed 2025 budget. To the surprise of many, Smotrich spoke on the budget with what appeared to be caution and responsibility. He said the country would switch to funding its inflated war bills through cutbacks and taxes rather than piling on debt. “We’ll aim for a 4% target deficit and make permanent adjustments totaling 35 billion shekels [$9.3 billion] to sustain that,” he said. Netanyahu has given Smotrich a go-ahead. Now the question is how Smotrich’s choices will be viewed by competing sectors, notably the ultra-Orthodox on one side and the trade unionists on the other.
“The good news is that the finance minister declared plans to pass a budget,” says Gal Hershkovith, a former head of budgets at the finance ministry. “Israel’s economic situation was like a car approaching a cliff—facing increased debt, a further spike in interest payments on government debt, currency devaluation, inflation and potentially a financial crisis.”
Yet Smotrich’s plan to freeze public-sector salaries and welfare allowances presents major challenges, Hershkovith says. The former requires the main labor federation to agree, which is most unlikely. For its part, the federation’s been demanding the shutdown of certain government offices and cutbacks in discretionary funds allocated to the parties in Netanyahu’s government, which are spent on religious schools and development of settlements in the West Bank, among other things. Those demands also face strong opposition.
The money has to come from somewhere. The Bank of Israel estimates that the war will have cost 250 billion shekels through the end of next year. Israel has already gone on a borrowing spree in domestic and international markets totaling just over 200 billion shekels through August. And borrowing has gotten more expensive, because investors have demanded higher interest rates since the war began. The finance ministry estimates extra debt costs of more than 7 billion shekels next year and 10 billion in 2026.
The ultra-Orthodox, also known as Haredim, could also scuttle a deal. They thought they were joining a dream coalition 21 months ago, but it’s turned into a massive disappointment for them. The goal was a government that fed its seminaries, boosted its welfare allowances and kept its young men free of army service to study. Yet the Supreme Court recently overturned the exemption—a ruling heavily supported by the public. While Parliament wrestles with how to draft tens of thousands of young Haredim, yeshiva and preschool subsidies are scheduled to stop in November, and pay raises for seminary teachers are already on hold.
Secular Israelis, who’ve been pulled from work for months to serve in reserves in Gaza and northern Israel, already resent the Haredim. They want the burden of defending the country more evenly distributed. This is also the population more likely to face higher taxes, frozen pay slips and soaring living costs. Some—though how many is unclear—have left Israel, setting up house in Portugal and Thailand as they wait for the crises to pass.
Mazal Mualem, a critical biographer of Netanyahu, says she suspects that when the deadline arrives, the prime minister will figure out the budget. “Netanyahu understands that an economic collapse will mark the end of his political career,” she says.
Others are worried. “Netanyahu is waiting to see what happens, like who wins the US election,” in the belief that Donald Trump will grant him greater freedom of action than Kamala Harris, says Meirav Arlosoroff, an analyst who writes for business daily The Marker. He may then decide whether to waive the budget and call an election or go with a less rigorous fiscal plan, hoping markets will forgive him during a time of war. Or he may do something totally unexpected. As she sees it, “He’s a wild card at this point.”
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