Budget crisis looms for Sharon

JERUSALEM, March 5 (JTA) – With a violent conflict on his hands and an upsurge in Palestinian terror attacks in Israeli cities, the last thing Ariel Sharon needs when he takes over as prime minister is a budget crisis.

But one of the first challenges Sharon will confront as soon as he puts his government together will be to secure approval for the long-overdue 2001 budget by the end of March.

If he fails, Israel will be thrown into yet another election campaign, according to law.

In recent years, securing approval for the budget has proved to be one of the trickiest political balancing acts for Israeli leaders.

As the Knesset and government have grown more fragmented each year, more political parties line up outside the prime minister’s door to present their wish lists.

In a normal year, their demands are incompatible with plans to restrain government spending, and the parties fight for concessions down to the last minute.

This year, the challenges are even greater.

First, there is the tight deadline, as the initial deadline – December 31 – already has been extended.

Second, a broad national unity government – and an unprecedented Cabinet that may include 30 ministers – – may mean that more parties expect a bigger piece of the national pie. On the other hand, they may have less leverage, since the government will not fall if small parties defect.

Yet the biggest problem is that, since the coalition of Ehud Barak, Israel’s outgoing prime minister, started crumbling last year, Knesset members have exploited the political vacuum to push through legislation that would cost the state about $750 million. The price tag for these bills is not included in proposals for the approximately $60 billion budget for 2001.

According to Silvan Shalom, a Likud member who is expected to become finance minister, the new government will do everything possible to solve this problem and push the budget through by March 31.

If it becomes impossible, however, there are plans to introduce a bill extending the deadline another two or three months.

This contingency could solve the problem, at least temporarily.

Finance Ministry officials are worried. In the absence of a budget for 2001, Israel operates on last year’s plan. Not only does this prevent the government from spending on new contracts that are important for economic growth, but it also locks the public sector into a tighter budget planned for last year.

Indeed, the looming budget debate catches Israel’s economy at a particularly sensitive time.

The economy finally pulled itself out of a four-year slowdown last year, and gross domestic product grew by a robust 5.9 percent. This year, the economy has been hit by several factors, and the Finance Ministry recently slashed its 2001 growth projections from between 4 percent and 5 percent to between 2 percent and 2.5 percent.

The six-month old Palestinian uprising against Israel has practically wiped out Israel’s tourism industry, which accounts for about 3 percent of the economy.

Tens of thousands of tourism jobs have been lost, and the Finance Ministry expects the unemployment rate to climb from 8.8 percent last year to as high as 9.5 percent this year.

The violence also dealt a big blow to the construction industry, since tens of thousands of Palestinian construction workers can’t reach their jobs inside Israel. Israel’s technology industry also is facing a difficult time because of problems on the Nasdaq stock exchange and weakness in the U.S. economy.

Vered Dar, deputy director of macroeconomics at the Finance Ministry, says the economy’s current vulnerability makes it even more important that the government control spending.

“The security situation, Nasdaq, the U.S. economy and domestic political uncertainty have all ganged up on us in 2001,” she said. “Let us at least make sure that macroeconomic policy, which is the one factor totally in our control, remains responsible.”

So far, the economic problems have not destroyed the Israeli economy’s standing in the international arena.

Foreign investment is expected to be weak this year because of the crisis, but Moody’s, the international credit ratings agency, recently decided to keep Israel’s credit rating at its current level.

The rating is important because credit ratings determine how much interest Israel will pay on money borrowed in international markets. A downgrade could cost Israel a bundle.

According to the agency, Israel’s economic slowdown this year is probably a one-time event.

Moody’s also said achievements in the Israeli economy in recent years have reduced the possibility that the crisis will harm the economy in the long term. Nevertheless, the group pointed out that part of Israel’s economic strength is predicated on the country’s determination to implement tight fiscal and monetary policy, as well as the introduction of greater competition in several sectors.

Will Sharon continue these policies, which brought Israel strong growth and zero inflation in 2000?

“We will do everything to pull the government out of the economic slowdown and reduce unemployment,” said the Likud’s Shalom. “The solution is to invest in infrastructure, education and high-tech.”

In public statements and private conversations, Sharon has expressed a commitment to pursue policies that would keep Israel’s budget restrained and inflation down.

Past governments have been pressed by the business community to convince the central bank to lower interest rates. Yet firm policies – especially in the face of economic uncertainties – are considered important for Israel to maintain its economic credibility in the international arena in difficult times. Analysts also hope that a national unity government will have more success in pushing through economic reforms, such as tax reforms, where narrower governments have failed. Some point out that it was a national unity government in 1985 that managed to pull Israel out of rampant hyperinflation.

“The market wants a national unity government because of the economic reform potential,” said Richard Gussow, Israel analyst at the Tel Aviv office of Lehman Brothers, the investment bank. “The odds are a lot greater under a unity government than either a Likud or Labor led government, and we saw that back in the 1980s when there was a much more difficult situation economically and only a unity government was able to pull us through it.”

However, many economic analysts point out that although Sharon is a Likudnik, he is a socialist Laborite at heart when it comes to the economy, supporting state involvement in economic affairs and industry. Sharon was also considered a big spender when he served in various ministerial posts.

“I don’t think there is any reason to believe that a 72-year-old who has always been a big spender will suddenly turn off the taps,” said one analyst from an international investment bank, speaking on condition of anonymity. “The budget is going to pass but he will have a bigger deficit than he is meant to have.”