Netanyahu’s fat man, thin man and the burden of the new state budget

As Israel was suffering from its worst economic recession two decades ago, then-finance minister Benjamin Netanyahu blamed the crisis on the fat man — the public sector — riding on the shoulders of a thin man — the private sector.

In an interview last December, just before forming a government with ultra-Orthodox and nationalist parties as his partners, Prime Minister Netanyahu recalled that the Haredi community’s high birthrate, low employment rate and reliance on state welfare had created a burden that contributed to that 2002 economic crisis.

Netanyahu explained that Israel’s economy 21 years ago was in trouble for various reasons, including its “lavish welfare system, which encouraged people to live on the dole and not to go out and work.”

Netanyahu’s remedy, he remembered, was “to put the fat man on a diet.” That included cutting the child allowances that grew bigger with each successive child and implementing wide-ranging structural and regulatory reforms to encourage economic growth and prosperity.

Now it seems the opposite is happening. As part of the spending plans for the next two years, the government has okayed the allocation of billions of shekels in funds to causes which the Finance Ministry and leading economists have warned will lower incentives and qualifications for entering the broader workforce, will stifle growth, and which represent an existential threat.

Early Wednesday morning, Knesset lawmakers ratified the bi-annual NIS 484 billion ($131 billion) and NIS 514 billion ($139.5 billion) 2023-2024 state budget, ending months of coalition bickering over funding priorities and demands by coalition demands with religious parties that had threatened to upend Netanyahu’s government.

Likud MK David Amsalem reacts during a discussion and a vote on the state budget at the Knesset in Jerusalem, May 23, 2023. (Yonatan Sindel/Flash90)

With a May 29 deadline to pass a budget or trigger new elections, Netanyahu scrambled to meet the demands of his ultra-Orthodox and religious coalition partners which include more than NIS 14 billion in funds for yeshiva stipends and schooling for the ultra-Orthodox community.

Out of the funds, almost NIS 4 billion was agreed to be spent on increasing the budget for stipends at religious yeshiva student institutions. About NIS 1 billion is directed as an allowance for a food voucher program being pushed by Shas leader Aryeh Deri.

Another NIS 1.2 billion is budgeted for private, non-supervised educational institutions, which do not teach core subjects such as math and English. Additional funds will be allocated to ultra-Orthodox education, building religious buildings and supporting Haredi Jewish culture and identity.

Nonetheless, Finance Minister Bezalel Smotrich hailed the budget as a “good budget” that will serve all “citizens of Israel.”

“The budget does not serve and does not provide a response to the needs of Israeli citizens such as investment in reforms for tackling the high cost of living in the country, which is not adequately addressed,” Daphna Aviram Nitzan, Director of the Center for Governance and Economy at the Israel Democracy Institute told The Times of Israel. “Instead, it allocates funds that are not growth drivers for the economy at the expense of a diminishing working population which will have to carry the high tax burden to finance this budget.”

High cost of living

The Israeli public is mostly concerned about the high cost of living, according to a survey released by the IDI on Tuesday. It showed that two-thirds of respondents think that food prices are the most significant factor, and around half blame housing costs, and 29% indirect taxation.

The majority of the public believes that the high cost of living is the fault of the government’s lack of action and only 27% blame the large monopolies, and 3-4% attribute responsibility to local manufacturers, importers, or supermarket chains, the survey found.

“The changing priorities of the government are very much reflected in the allocation of the coalition funds,” Itai Ater, an economics professor at the Tel Aviv University told The Times of Israel. “Previously, funds for Haredi institutions were made available on certain conditions of teaching core subjects and an understanding that the ultra-Orthodox community needs to be incentivized to join the labour force.”

In Israel’s economic plans going forward as laid out by the Finance Ministry and the Bank of Israel, there is a consensus that the integration of the rapidly growing ultra-Orthodox community into Israeli society and its economy is an existential challenge. The main tools are boosting employment rates and reforming the ultra-Orthodox educational system by teaching core subjects to equip its graduates with the essential qualifications and tools to join the labor force.

“Two things have changed in that regard, we give them more money, and we don’t give them the necessary core education,” said Ater.  “The economy cannot survive without more Haredi men joining the labour force.”

“Many Haredi women are already joining the workforce, but with regard to Haredi men, we are very far from being in a good place,” he added.

Today, almost 25% of kids under school age are born to ultra-Orthodox families, and this proportion is expected to double by 2050. Overall, the ultra-Orthodox community makes up 13% of Israel’s population and with an average 6.5 children, it will constitute 16% of its population by the end of the decade, and will account for about a third of it by 2065.

The average monthly salaries of Haredi households — NIS 14,121 — are far lower than their non-Haredi counterparts, who earn NIS 21,843.

Itai Ater, an economics professor at Tel Aviv University. (Courtesy)

The Finance Ministry has already warned that the allocation of funds to ultra-Orthodox institutions and initiatives creates negative incentives for Haredi men to seek employment and will harm the labor market and the economy as a whole. With no change in the employment rate among ultra-Orthodox men, the loss of cumulative GDP until the year 2060 is expected to be NIS 6.7 trillion, the ministry projected.

A diminishing workforce also means that the government collects less taxes, which is main source of revenue for funding the state budget and government services. If Haredi men are not encouraged to work, by 2065 the government will have to increase direct taxes by 16% to maintain the same level of services such as health care and transportation, which it provides without increasing the deficit, according to ministry estimates.

Israelis are already struggling to make ends meet with rising costs of living, while economic growth forecasts have been cut and investments are hampered by the uncertainty surrounding the government’s plan for a judicial overhaul and a slowdown in the global economy. Israel’s economic growth prospect for 2023 was this month lowered to about 2.7% from the 3% forecast in January.

High-tech investment budget cut

While funds allocated to causes benefiting the ultra-Orthodox community have been increased, other budgets for government entities that encourage economic growth have been reduced. One of the government bodies that is affected is the Israel Innovation Authority, a government agency responsible for the thriving local tech ecosystem, which will see its NIS 1.5 billion budget lowered to NIS 1.4 billion.

Israel’s high-tech industry is the main growth engine of the economy, generating about 18% of GDP and is responsible for over 50% of exports and about 30% of payroll taxes. It also employs about 11% of the country’s workforce.

The Israel Innovation Authority stated that “despite the efforts made throughout the past few weeks, the 2024 budget that features cross-section cuts will include a significant NIS 100 million reduction in high-tech investments’ budget.”

The authority provides the majority of state grants to local early-stage startups to support disruptive technologies and to help grow the country’s tech industry.

“Due to this planned budget cut, the Innovation Authority will have to prioritize its programs and downsize its investment in startups, growth companies and in supporting future innovations of strategic importance to Israel such as climate tech and artificial intelligence,” it was added.

That’s as Israeli tech companies are struggling to raise new capital in recent months amid the global tech downturn. In the first three months of the year, Israel startups raised $1.7 billion in funds, down 70% from the $5.8 billion in the first three months of 2022, according to data by IVC Research Center and LeumiTech. The quarter marked the lowest figure in four years.

“Our miracle is the high-tech industry, but we cannot survive on that only,” said Ater. “It’s simply impossible to sustain a progressive and liberal economy, if you have such a big part [ultra-Orthodox men] of the population not joining the labour force and those who are working are earning low wages because of their skills.”

In the absence of natural resources, apart from recent natural gas discoveries, the development of human capital and knowledge have been the main growth drivers of Israel’s thriving economy and society.

The government’s decision to allocate funds in favor of Haredi educational institutions, which fail to provide core education in math, science and English needed to work in a tech-driven economy, put the bedrock and development of Israel’s human capital under threat.

As the proportion of working taxpayers, who also serve in the army, diminishes and a fast-growing ultra-Orthodox population is not entering the workforce boosting disproportionate welfare entitlements, the thin man will be unable to carry the heavy weight of the obese fat man.