Will fiscal credibility be maintained?
Netanyahu to form the next government
* The right wing/ultra-religious parties received 64 mandates (out of 120) and should have no problem forming a stable coalition.
* The fiscal demands of the ultra-orthodox parties include cancelling the tax on soft drinks and disposable utensils, as well as increased funding for their school system and free kindergarten for ages zero to three. The first two demands are likely to be realized, while the third will most likely be postponed. Much uncertainty remains regarding who will be Finance Minister, although Arie Derry from Shas (ultra-orthodox) is a main candidate.
* The fiscal implication of the first two measures is not so significant: around 1bn ILS in tax loss, and 2.5-3bn for additional educational spending and Yeshiva stipends, representing around 0.25% of GDP. Free kindergarten care, if implemented, has a much more costly implication of 20bn ILS.
* No less problematic is the demand to allow the ultra-religious schools not to teach basic core skills such as math, science, and English, as a pre-condition for receiving full government support. This could have implication for Israel’s long-term growth potential.
* Regarding the political arena, much uncertainty remains regarding the handling of the increasing violence in the Territories, and whether this will lead to an escalation. Netanyahu will have to restrain the more radical far-right-wing members of his coalition.
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