Israel Politics July 2021

Israel: Opposition parties form coalition to oust Netanyahu, although new government will be fragile

Parliament voted in a new government in mid-June, ending Benjamin Netanyahu’s 12-year premiership. Naftali Bennett from the right-wing Yamina party became prime minister under a power-sharing agreement, and in September 2023 will hand over power to Yair Lapid, leader of the centrist Yesh Atid. Given the multiple parties that form the government and their slim parliamentary majority, the new administration will be fragile. As such, it will likely focus on domestic economic issues where the possibility for consensus exists, and will continue efforts to boost commercial ties with Arab neighbors, with major policy changes unlikely. Moreover, the government formation improves the prospects for the approval of a 2022 budget, following failure to pass a budget in the previous two years. Despite a potential lack of substantive reforms, economic prospects for the coming years are still positive.

The new government is backed by eight political parties, ranging from the Arab party Raam, to the right-wing Yamina and New Hope parties, and leftist groupings such as the Labor Party. Moreover, parliament voted Bennett in by a single seat in a 60-59 split, while Netanyahu remains in parliament as leader of the opposition and is likely to mount fierce resistance to the administration in a bid to return to power. In addition, Israel’s last attempt at a power-sharing agreement between Netanyahu and Benny Gantz ended in early elections following a fractious relationship between the two. The upshot is that the government could be unstable and potentially short-lived—particularly considering that no government in Israel has completed a full four-year term in decades.

As analysts at the EIU said:

“The Economist Intelligence Unit expects the next government to be riven with crosscutting divides on economic, security, judicial and societal issues and to ultimately collapse early in its term […]. Mr Netanyahu will remain a political force early in the forecast period […]. He would still have a chance of forming a government following another election given the right-wing leanings of the electorate and his ability to leverage his past experience in forming multiple coalition governments.”

On the economic policy front, in his inaugural speech Naftali Bennett pledged a range of measures to address domestic issues, including boosting homebuilding, raising income support for the elderly, improving the transport system and increasing the number of workers in the tech sector. On the foreign policy front, the new foreign minister visited the UAE at the end of June to open the Israeli embassy, in a sign that the incoming government intends to continue strengthening ties with Arab neighbors. However, progress on the thorny issue of Palestine is unlikely given the radically different views within the government.

Regarding fiscal policy, the new finance minister recently pledged a “responsible” stance. After the fiscal deficit and public debt soared due to the pandemic, the focus of the administration will likely be on reducing the budget shortfall while simultaneously maintaining some targeted support for vulnerable groups.

Analysts at Moody’s regard the government formation as credit positive and commented:

“We expect the lack of ideological cohesion to increase incentives to focus primarily on economic policies rather than more divisive issues. The passage of a new budget will be key to gaining greater visibility on the medium-term fiscal policy outlook after the weakening we have observed in Israel’s fiscal policy effectiveness in recent years, in part because of the polarised political environment.”

Even in the likely event of a lack of major economic reforms and a less expansive fiscal stance under the new administration, the economic outlook for the coming years is fairly positive.

As Padmasai Varanasi, economist at Oxford Economics, said:

“Over the medium term, the growth of services, gas sector developments, reallocation of resources across sectors and measures to raise labour productivity will underpin economic performance. While tighter fiscal policy may be necessary to reduce the budget deficit, a robust service sector and strong consumer demand should support growth. Peace treaties to foster geopolitical stability will also help sustain growth.”

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