The Economic Consequences of the High Court’s Ruling on the Haredim and the “Herd of Goats” in the Budget Review

The verdict of the High Court of Justice (High Court of Justice), which ruled that “at the moment there is no legislative framework that allows making distinctions between yeshiva students and others subject to conscription for military service” and that “the state cannot continue to transfer subsidies to yeshivas and kollels for students who have not received release or deferment from military service,” became the main news story of the week in Israel, including economic.

The editors of Newsru.co.il continue to publish economic reviews prepared by journalist Mikhail Shafranov.

Call or money

I must say that at this point the real consequences of the High Court’s ruling are impossible to predict. I do not see a scenario in which the IDF will send the Military Police after thousands of ultra-Orthodox deserters, just as I do not see a scenario in which they will show up voluntarily at the recruiting stations in the thousands. Those who are ready to serve are already there. The rest are under too strong a community influence, and without a change in the climate within the community, the situation will not change. Therefore, the second part of the ruling is more important than the first, since it has a greater chance of influencing what happens within the communities.

Ultra-Orthodox leaders depend on their communities as much as their communities depend on their leaders, and economic pressures ultimately force leaders to accept change from within. This happened in the early 2000s after child benefit cuts forced ultra-Orthodox women to work, and in the late 2010s when soaring housing prices forced some men to work and women to change their studies to earn more. During the coronavirus pandemic, the need for working women to work remotely has forced rabbis to allow many ultra-Orthodox families to access the internet from home.

What new balance of power will be achieved in relations between the state and the ultra-Orthodox communities (it is worth remembering that this is not a single mass) in financial terms in the coming months will depend on how large-scale changes will occur in them in the next few years.

Look at the herd

While politicians are trying to agree on the fate of the ultra-Orthodox appeal, the Finance Ministry has begun discussing the 2025 state budget, in which, according to the most optimistic forecasts, it will be necessary to find 30 billion shekels to prevent the uncontrolled growth of the state budget deficit. Traditionally, when proposing a package of reforms and fiscal measures when preparing the state budget law, the Finance Ministry includes deliberately unrealistic points so that ministers and MKs have something to show voters as defenders of their interests. Such points are called goats in Israeli political jargon.

This time, given the scale of the necessary cuts, Finance Ministry officials presented for consideration a package of measures totaling 100 billion shekels, so that politicians themselves could determine which of them will become “goats” and which have a chance to be implemented.

Increasing VAT by another percentage point in addition to that already approved, cancelling the VAT exemption for online purchases, introducing VAT on services for foreign tourists, cutting child benefits, freezing wage growth in the public sector, refusing to index income tax levels (de facto increasing the tax), accelerating the introduction of the mileage tax, returning the excise tax on sugary drinks, cancelling the tax exemption for advanced training funds starting from the seventh year of deductions, selling state-owned real estate, cutting benefits for career military personnel, cutting coalition money, etc.

At the same time, the Ministry of Finance insists on the realization of working potential as a condition for receiving any benefits and subsidies from the state, including kindergartens, council tax discounts and payments from the National Insurance Institute. Other measures announced include high-tech tax reform, reduction of bureaucratic procedures in the construction of infrastructure, transfer of part of the powers from the central government to municipal structures, etc.

It is difficult to disagree with Finance Minister Bezalel Smotrich, who said that “forming the 2025 budget will not be easy,” but sharing his confidence that the government will be able to show fiscal responsibility is much more difficult. Especially if you remember that the head of government is categorically against raising taxes, in order to affect any rights of workers you need to negotiate with trade unions, and the financial commission, which is key in approving the state budget, is headed by Moshe Gafni, who knows how to use his powers well.

Import reform – between PR and reality

In between political battles, this week the MKs prepared for the second and third readings the flagship reform of the government in general and the Ministry of Economy in particular in the area of ​​combating the high cost of living, known under the slogan “What’s good for Europe is good for Israel.” The idea of ​​the reform is simple and clear – to remove special Israeli standards that significantly limit and increase the cost of imports for goods sold in the European Union, and to bring the entire Israeli standardization system into line with EU directives. Minister of Economy Nir Barkat promised that the reform will cover at least 80% of imports, with an emphasis on mass-market products, which will lead to a significant reduction in their prices.

Alas, at the meetings of the Knesset Economic Commission it became clear that what is desired and what is actual in this case are two very different things. The Lobby 99 organization showed at the commission meeting that at the first stage of the reform, out of 538 Israeli standards, 300 will remain completely untouched, and more than 100 have references to other laws and regulators.

In fact, only 17 standards will be changed as part of the reform in their entirety, without any exceptions.

According to the Kakhelet Forum, which also promotes regulatory reform, of the $23 billion in imports subject to regulation, only $1.6 billion of imports will be affected by the reform.

After accusations were made at the committee meetings that this was a sham rather than a reform, Nir Barkat made accusations against his colleagues: “There are people in the political system who want to fail the reform in order to shift the blame onto Nir Barkat.” He was not embarrassed by the fact that his own department was blocking the repeal of nearly a hundred standards.

According to Lobby 99, the Department of Energy is blocking the repeal of 194 standards, the Ministry of Economy – 92, the Ministry of Health – 58, the Ministry of Construction – 39, the Ministry of Homeland Security – 24, the Ministry of Agriculture – 2.

It is worth noting that, in parallel, the Knesset Health Committee considered the reform of personal hygiene and perfumery products and the reform of food products, and here the Ministry of Health did a much better job, introducing into Israeli standards a direct reference to the European Union directives regarding the quality of goods.