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Battle over Israel's budget risks election, more economic gloom

Placards denouncing Prime Minister Benjamin Netanyahu and his handling of the coronavirus pandemic during a demonstration on October 17, 202 [JACK GUEZ/AFP via Getty Images]
Placards denouncing Prime Minister Benjamin Netanyahu and his handling of the coronavirus pandemic during a demonstration on October 17, 202 [JACK GUEZ/AFP via Getty Images]

A festering government crisis over the passage of a national budget could push Israel into its fourth election since mid-2019, further straining an economy hard hit by the coronavirus pandemic.

Crunch time is approaching: Prime Minister Benjamin Netanyahu's bickering coalition, patched together in May, has by law until December 23 to pass the 2020 budget, a move held up by political stalemate and successive national ballots.

Gantz and Netanyahu: awaiting the consequences of the Israeli government formation - Cartoon [Sabaaneh/MiddleEastMonitor]

Gantz and Netanyahu: awaiting the consequences of the Israeli government formation – Cartoon [Sabaaneh/MiddleEastMonitor]

Failure to do so by the deadline would automatically trigger an election that both right-wing Likud leader Netanyahu and his main governing partner, centrist Blue and White party chief Benny Gantz, insist they do not want.

Yet, Gantz wants a 2021 budget passed in tandem, saying it would speed up Israel's economic recovery and is demanding real progress be made soon. "It's either a budget or elections," he told Ynet TV last week.

Netanyahu says that with the December passage date fast approaching, working out the details of such a longer-term package now was impractical.

READ: Over 50% of Israelis want Netanyahu to resign

It's a game of thrones, political and economic commentators said, with a budget crisis a potential means for Netanyahu to hold a new election and scupper a "rotation" pact under which he would hand over the premiership to Gantz in November 2021.

Rating agencies have cautioned that further budget delays would raise concerns about Israel's ability to implement prudent fiscal policies and could affect credit ratings.

Two national lockdowns to lower COVID-19 infection rates have dealt heavy blows to the economy, already in recession, and set to contract for the first time in two decades, with unemployment now above 12%.

"We've been giving the government the benefit of the doubt and expect some reasonable medium-term fiscal consolidation action — steps taken by the government," Karen Vartapetov, a sovereign rating director at S&P, told Reuters.

S&P is carrying out a review of Israel's rating next month and Vartapetov said all options were open, including no rating action, an outlook downgrade to "negative" from "stable" as well as a rating reduction.

READ: Israel government mulls reducing salaries of officials, including PM

Bank of Israel Governor Amir Yaron has urged Netanyahu's government to accelerate the 2021 budget, saying last week on Army Radio that it could be completed in December.

While the budget battle plays out, Momi Dahan, a Hebrew University economist, said concern over "amateur management" of the economic crisis could weigh on investors and consumers.

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