Will fiscal credibility be maintained?

ISRAEL - In Brief 06 Nov 2022 by Jonathan Katz

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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, which the third will most likely be postponed. The fiscal implication of the first two demands is not that significant: around 1bn ILS in tax loss, and 2.5-3bn for additional educational spending, and Yeshiva stipends, representing around 0.25% of GDP. The current fiscal surplus allows for some additional spending without threatening fiscal credibility. Regarding the political arena, much uncertainty remains regarding the handling the increasing violence in the Territories, and whether this will lead to an escalation. Netanyahu will have to restrain the more radical far wing members of his coalition. So far, markets appear indifferent. The shekel weakened modestly by 0.6% against the basket of currencies since the elections. Wage growth appears to be accelerating The average wage increased by 1.2% m/m in August and by 4.4% y/y, up from 4.0% last month. Public wages have remained nearly stable due to a lack of a wage agreement while business (private) sector wages are increasing by about 5.5% y/y. Public sector wage pressure will most likely push public sector wages up in 2023, following the wage agreement with the Teacher’s union. High-tech service exports increased in July-August to a level 5% above that of the 1st half of the year. January-Augus...