Israel is in the midst of a dramatic economic recession. Since the crisis started six months ago, our two-headed government has failed to present a consistent and sustainable recovery plan. The Cabinet and the Knesset are incredibly short-sighted, and their policies are only driven by fear of new elections or lobbying from special interest groups.
It is now quite clear to most Israelis that this government will financially reward any pressure group that shouts loudly enough. Those populist and irresponsible policies considerably harm the economy and are also very costly. Approximately 8% of our GDP has already been distributed, amounting to 70 billion shekels! Yet, the country has not experienced any visible economic improvement, the unemployment rate is still above 20%, and the economy contracted by 28% in the second quarter. It is also clear that welfare payments will climb rapidly, as the government still restricts citizens from working and prevents businesses from operating at standard capacity.
To distribute money and keep most of the country on welfare, the government will need income. This income can only be generated by taxes on productive individuals and businesses. Unfortunately, instead of adopting a "laissez-faire" approach to encourage economic growth, our government adopted policies that prevent the private sector from generating income and jobs.
Reducing the unemployment rate should be the number one priority. Yet, the government encourages the unemployed to stay at home and enjoy guaranteed income until June 2021. An individual who returns to work for a temporary or part-time position immediately loses his/her benefits. Recipients are also "forbidden" to open a small business or become self-employed. Those restrictions are totally counter-productive. They discourage workers from returning gradually to the labor force, accepting a lower-paying job, or opening a small business. A better policy would have been to institute a "negative income tax." Such a system guarantees that unemployed recipients do not see a drop in income even when going back to work at a lower salary. It gives job seekers the incentive to accept less attractive offers, knowing that their income will be kept constant by the negative tax scheme. In the current system, it does not pay for most workers to go back to work. It is already the case that many job offers for low skilled occupations are not being filled.
The government also decided to give special grants to businesses absorbing workers. This one-time monetary grant encourages firms to hire workers to receive the funding and subsequently fire them as the grants' term ends. A better policy would be to reduce labor costs by canceling all employers' payroll taxes and mandatory contributions, lowering labor costs by 30%. Reducing the price of labor will encourage companies to hire workers and help reduce unemployment.
Bad policies are preventing our economy from starting its recovery. If Israel does not change its course immediately, the effects of the current policies on the economy will be disastrous.
