Emergency economic plan crisis highlights Israel’s ineternal divisions
By firing a number of cabinet ministers, Israel’s Premier Ariel Sharon has refused to cave in to the demands of the religious Shas party. With the country now facing the prospect of a new government coalition void of religious parties, the passing of an emergency economic plan should uphold the country’s economic reputation internationally.
The composition of Israel’s governing coalition is likely to undergo a transformation, following the initial rejection by the parliament (Knesset) of an emergency economic plan. After the program was defeated, Prime Minister Ariel Sharon promptly fired four Shas cabinet ministers, as well as three deputy ministers from Shas and two from United Torah Judaism (UTJ) who voted against the economic plan.
The $2.7 billion emergency economic package is designed to reduce an inflating budget deficit caused by higher defense spending during the 19-month Palestinian uprising and by lower tax revenues. Shas and UTJ have both opposed the proposed 24 percent cut in child allowances for families that do not serve in the army.
The action against Shas would end its partnership in Sharon’s governing coalition and would imply the loss of the party’s 17 votes in the 120-member Knesset. Such a loss would make Israel’s Prime Minister more dependent on the Labor Party for survival in power. However, the pro-secular Shinui party, with six seats, could be prepared to join a coalition free of religious parties, a move than would bring Sharon’s governing coalition back to 66 seats.
In spite of its initial rejection, the emergency austerity plan was approved on Wednesday, May 22, after the Knesset’s Constitution, Law and Justice Committee accepted the government’s request to vote on the economic plan for a second time. The recent approval signifies both a political victory for the Prime Minister and an economic victory for the country. Finance Minister Silvan Shalom had warned that Israel’s international credit rating would likely be harmed if the emergency economic plan were not approved.
Such a move would have devastating consequences for an already ailing Israeli economy, which is expected to contract by 0.5 percent this year. Hotel vacancy rates hover around 90 percent, unemployment now exceeds 10 percent and inflation expectations have risen to 5-6 percent. Due to higher price levels, the Bank of Israel will likely raise interest rates by 0.9 percent to 5.5 percent. Meanwhile, even if the proposed economic plan is passed, the 2002 budget deficit is projected to reach 5.4 percent of GDP (Gross Domestic Product), far above the target level of three percent.
With the economy in deep recession, economic reforms once viewed as critical to Israel’s prosperity have been shelved. These include a sweeping plan to privatize dozens of inefficient state-run corporations and a proposition to privatize the state’s ports. Moreover, key aspects of a tax reform plan have been delayed, leaving Israel among the highest taxed populations in the world.
Meanwhile, a recent proposal recommends turning Israel into a tax haven for foreign firms. According to this scheme, both profits and dividends of foreign companies registered and managed in Israel would enjoy a lower tax rate—compared to the present corporate tax rate set at 36 percent—thus encouraging foreign firms to establish operations in Israel. Such a move would serve to attract foreign firms and act as a much-needed economic stimulus.
The crisis surrounding Israel’s emergency economic plan highlights divisions between the country’s religious and secular populations, which have been subdued as Israel has coped with more pressing security issues. In the upcoming days, international financial markets will be monitoring the Israeli economy, making the Knesset vote critical to the state’s international credit rating. — (menareport.com)
© 2002 Mena Report (www.menareport.com)