Israel: Parliament dissolves following failure to pass budget, complicating fiscal response to Covid-19 crisis
At midnight on 22 December, after a deadline to pass the 2020 budget was missed amid disagreement between Prime Minister Netanyahu and coalition partner Benny Gantz, the Knesset was dissolved and general elections—the fourth in two years—were set for 23 March 2021. The current coalition government remains in a caretaker capacity. As a result, the country is also without a 2021 budget, with spending priorities set according to a pro-rated version of the 2019 budget. This will likely make it more difficult for the government to respond decisively to the Covid-19 crisis. Moreover, a credible plan to put the public debt to GDP ratio on a downward path will continue to be illusive, raising the risk of credit rating downgrades. However, before its dissolution, parliament passed a bill enabling the government to continue funding its activities in the absence of a new budget, avoiding a public-sector shutdown which would have hit the economy.
Current polls suggest an even more fractured parliament emerging after the elections, with both Netanyahu’s Likud party and Benny Gantz’s Blue and White alliance set to lose considerable support at the hands of Yamina and New Hope, two right-wing parties.
Looking at the recent political developments, analysts at Goldman Sachs commented:
“Structural changes in Israel’s balance of payments have led to a strengthening of buffers and reduced the sensitivity of the Israeli economy to political developments. […] Nevertheless, the ongoing inability to form a stable government and a budget, especially during a pandemic, still carries risks. How the new government will form the budget and bring the budget deficit back to a sustainable path in the aftermath of the pandemic will also have implications for the economy.”