Starting in March 2020, the unfolding coronavirus crisis began making itself felt in the Israeli economy and budget activity. It has had major effects both on government expenditures and government revenue from taxes.

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The deficit for the first nine months of 2020 has reached 102.4 billion shekels ($30.2 billion), compared to 31.1 billion shekels ($9.1 billion) for the same period of 2019. In the past 12 months, the national deficit has grown to 9.1% of the GDP. In September, the government brought in 23.9 billion shekels ($7 billion) from the local market, as well as raising half a billion shekels more abroad.

In September 2020, government expenditures totaled 43.2 billion shekels ($12.7 billion). Since the start of 2020, the government has spent some 300 billion shekels ($88.4 billion), 42.9 billion shekels ($12.6 billion) of which went to fighting the COVID crisis.

Government revenue for September 2020 totaled 28.3 billion shekels ($8.3 billion). Revenue for the first nine months of 2020 stood at 233.7 billion shekels ($69 billion), nearly 10% less than in the first nine months of 2019.

In related news, mandatory quarantines cost the economy 2.6 billion shekels ($767 million) in September, the Knesset Foreign Affairs and Defense Committee was informed on Monday.

In a meeting of the committee, a group of senior officials from the manufacturing sector led by president of the Israel Manufacturers Association Dr. Ron Tomer, threw their support behind an initiative from committee chairman MK Zvi Hauser to shorten quarantine for essential workers to 10 days, and quarantine for non-essential workers to 12 days.

The IMA presented the committee with figures showing that 7% of workers in essential sectors were in quarantine. The representatives told the committee that more than half of Israel's industrial companies had reduced output and that 48% were struggling to keep up with orders because of an employee shortage due to quarantine.

"Israel's system of quarantine is killing the economy," Tomer told the committee.

Economist Eyal Toledo of the Finance Ministry's Budgets Department told the committee that the ministry had updated data which indicated that shorter quarantine times would save the economy some 750 million shekels ($221 million) per month.

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Speaking at a meeting of the Knesset Finance Committee, Turner-Eyal said that the government's financial aid plan, which extends unemployment benefits through June 2021, incentivizes many citizens not to work.

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Turner-Eyal said that employees refusing to return to work from furlough would be considered employees who resign willingly, and therefore be entitled to unemployment benefits for only three months from the day they inform their employers of their decision.

Turner-Eyal took a stance against the idea of Israel adopting Germany's model, which allows partial unemployment benefits to be paid concurrently to an employee's salary or wages, arguing that the Germans themselves were not satisfied with the plan and that it could cost Israeli taxpayers "billions," as some employers would cut back on workers' hours.

Another possibility under consideration in the Treasury is to issue grants to workers who return to their jobs at reduced salaries or wages. Such grants would cover the pay gap and could be issued by the National Insurance Institute.

As of mid-August, there were 414 unemployed Israelis, a slight drop from July. This equates to 10.4% unemployment, less than a third of the unemployment rate at the peak of the coronavirus crisis in April of this year, when it stood at 35%.

Turner-Eyal said that 45,000 businesses had applied for 2.6 billion shekels ($764 million) worth of grants to subsidize bringing employees back on board, but that as of Tuesday, only 13% of those grants (350 million shekels or $103 million) had been paid out.

In addition, Turner-Eyal opposed another lockdown, saying, "We need to avoid that. We need to adopt different steps [for different locations] in order for the economy to recover."

As for Israel's budget deficit, Turner-Eyal predicted that it would reach 13.4% by the end of 2020, but could be bigger if the government opted for another lockdown. Currently, the national deficit stands at 8.1%, nearly three times what it was prior to the coronavirus pandemic.

Turner-Eyal also objected to a proposal from Professor Avi Simhon, an economic advisor to Prime Minister Benjamin Netanyahu, to drop VAT to 12%, a reduction of close to one-thirdd.

"Most economists think that this is not the time to lower VAT," she said.

Also on Tuesday, the Finance Ministry published date indicating that the housing market slowed down in July. According to a report from the ministry's chief economist, home sales for July stood at 9,700, 7% fewer than in July of 2019 and 17% fewer than in June 2020.

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"I'm not happy that we got [an estimated] six seats, but it saved the party from death," said Marciano, the only Labor official who agreed to speak on the record immediately after exit polls were announced.

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Labor leader Amir Peretz kept away from the modest election headquarters in the Yad Eliyahu neighborhood of Tel Aviv.

Peretz knows that while he managed to keep the party out of the dustbin of history, he has a lot of work ahead of him.

A senior Labor official told Israel Hayom that there was "no chance" Labor would join a coalition with Prime Minister Benjamin Netanyahu.

"Amir Peretz will keep his promise," the official said.

Approximately half an hour after exit polls were announced, Peretz sent a message to Labor activists.

"I ask that you wait until the final results are in, and all our friends at the polling places finish their work," he said.

"The media spent a month and a half slaughtering us," Marciano said.

"Right now is not the time to sum things up. … Amir Peretz was elected party leader two months ago. We got a party that was wrecked, with debts. A day after Peretz was elected, Shelly Yachimovich resigned, Tal Russo left, and [former leader] Avi Gabbay didn't do anything."

"[Ehud] Barak left, Stav Shafir left. Joining forces with Gesher was one of the good things that happened, and you'll see that in the end Orly Levy-Abekasis and her colleagues do a lot for us. We inherited a party that had a deficit of 8 million shekels [$2.3 million]," Marciano said.

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Investors are waiting to see if Gulf Arabs will offer a lifeline that may provide some breathing space.

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Lebanon has one of the world's heaviest public debt burdens, after years of big budget deficits rooted in waste, corruption, and sectarian politics.

The government is now trying to put the public finances on a more sustainable footing with a budget to cut the deficit and a plan to fix the state-run power sector, which bleeds funds while inflicting daily power cuts on Lebanese.

After years of backsliding, the impetus to reform has grown due to economic stagnation and a virtual halt in the flow of dollars into Lebanon's banks from abroad. Lebanon has depended on such flows from its diaspora to finance the current account and the state budget deficits.

The government hopes the state budget approved by parliament last week will help confidence by slashing the deficit. An international support group for Lebanon, including donor states, welcomed it as "an urgently needed first step" and urged further reforms.

But many doubt the government can meet its goals. The IMF says this year's deficit is likely to be well above a targeted 7.6% of national output – and donors are still waiting to see important parts of the power plan implemented.

Foreign reserves, while still large relative to the size of the economy, have been falling. This has led banks to launch a new bid to attract dollars by offering 14% a year to depositors willing to lock up large sums for three years – funds which the banks redeposit at the central bank for yet higher returns.

Lebanon's risks are reflected in the cost of insuring its debt, which surged back to the highest of any government in the world after briefly easing in the wake of parliament approving the budget on Friday, signaling an elevated risk of default.

"We believe investor malaise towards Lebanon is unlikely to dissipate soon," said Yacov Arnopolin, senior portfolio manager at Pimco, one of the world's biggest asset managers.

"While the significantly delayed budget passage is a step in the right direction, much remains to be done before the country is on a sustainable trajectory," he said.

"Foreign investors have been spooked by deposit flight."

Bank deposits, which have grown consistently on annual basis since the end of Lebanon's 1975-90 civil war, have dipped by about 1.7% in the first five months of 2019.

Such outflows are typically seen at times of major shocks, such as the 2005 assassination of former Prime Minister Rafik al-Hariri, economists say.

'Small steps for a big crisis'

The budget included some politically tricky measures, such as a three-year freeze on state hiring. More difficult ideas were torpedoed, such as a public sector pay cut, and critics say the government also avoided the main problem: corruption.

The major deficit reduction measures include hiking tax on the interest paid on bank deposits and government bonds, a new import duty, and a plan to cut debt servicing, though it is not yet clear how that will be achieved.

"It is small steps for a big crisis. We have a very difficult situation that needs drastic steps, drastic measures, and none of them are being taken," said Sami Gemayel, head of the Christian Kataeb Party, one of the few parties not represented in Prime Minister Saad al-Hariri's unity government.

Deputy Prime Minister Ghassan Hasbani told Reuters the budget was a good step but fell short of what is needed.

"I expect the sense of urgency to rise over the next few months and trigger a series of major reform activities," he said. The impact of these would be seen in the 2020 budget.

Hariri hopes reforms will unlock about $11 billion pledged at a Paris conference last year to finance investment.

"We think this budget is a decent start. The deficit will show a contraction," a Western diplomat said, adding: "They need to crack on with implementation of reforms but also with the 2020 budget."

A recent IMF mission said this was "an important moment for Lebanon" and the budget and power sector reform plan were "very welcome first steps on a long road."

It also noted that deposit inflows had virtually stopped and the central bank's foreign reserves had dropped by around $6 billion since early 2018 despite continued central bank operations to support them.

'Deep-pocketed sponsors'

Investors now hope that Gulf Arab states, notably Saudi Arabia, may offer financial backing after a delegation of former Lebanese prime ministers met King Salman.

One of them, Najib Mikati, said Riyadh would "extend a hand of support." The Saudi ambassador to Lebanon said the visit heralded a promising future for ties which have been strained with the growing power of the Iranian-backed Shi'ite Hezbollah.

Saudi Arabia has yet to spell out what it might do.

Its rival, Qatar, has also signaled readiness to help, saying last month it had bought Lebanese bonds as part of a planned $500 million investment to support Lebanon.

Farouk Soussa, senior Middle East and North Africa economist with Goldman Sachs, said Lebanon's deteriorating foreign exchange liquidity was "the real near-term pinch."

"The real challenge is to stimulate capital inflows, either from depositors or investors," he said. Gulf support would "underpin investor confidence by sending a strong signal that Lebanon can rely on deep-pocketed sponsors," he added.

Goldman Sachs remains bearish on Lebanon, said Sara Grut, emerging markets strategist with the bank.

'Red flags'

Alongside the fiscal crunch, the role of the central bank is also in focus.

The IMF mission said the central bank had skilfully maintained financial stability in difficult circumstances for some years, but the challenges have grown.

It called for action to increase the resilience of the financial sector through a stronger central bank balance sheet and increased bank capital buffers. The central bank should gradually phase out its financial operations and step back from government bond purchases, it said.

Toufic Gaspard, an economist who has worked as an adviser to the IMF and to the Lebanese finance minister, said Lebanon was in "absolutely" its worst ever financial shape.

He says debate about fiscal problems has diverted attention from central bank "financial engineering" operations, which he called "the most important risk."

"The central bank has been buying dollars because of falling reserves. However this is not the problem per se, the problem is that for many years it has been paying very generous interest rates to banks," he said. "These are red flags."

Gaspard wrote a paper in 2017 saying the policy was resulting in "mounting losses" for the central bank, which has not published a profit and loss account since 2002.

The central bank said at the time that its interest rate policies were in line with Lebanon's risk profile. It said it is required annually to report its balance sheet and profit and loss accounts to the

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Yaron said that without the steps approved by the government, the nation's deficit would exceed 4.5% for 2019. Ten days ago, in a phone briefing to reporters, the Treasury said that the deficit stood at 4%.

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Yaron told ministers at the weekly cabinet meeting that "it is important that these steps be implemented to send signals to the markets that the decision makers are starting to address the inflated deficit."

Yaron repeated that the deficit was 4.5%, not 4%, and would only remain at that level if the economy continued to grow at the expected rate, with no aberrations.

"The debt-to-GDP ratio, which has dropped in recent years, and fiscal responsibility, are an important strategic tool for Israel. If the deficit is not fixed by the government immediately, the debt-to-GDP ratio will likely rise to over 65% in 2020. A drop from 70% to 65% [debt-to-GDP ratio] is a big difference, as is the rise from 60% to 65%," Yaron said.

Yaron recommended that the government identify the "less important" expenditures, and cancel them. He also recommended that the nation's tax infrastructure be examined and that unwarranted tax exemptions be revoked.

In addition, Yaron said that the government would have no choice but to bite the bullet and raise taxes. He said that the current fiscal picture presented "challenges," and that it was important that the next government take immediate action to address those challenges.

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The ministry plans to impose a NIS 1.15 billion ($319 million) lateral budget cut on all government ministries between 2019 and 2021.

Another measure aimed at filling state coffers will see a hike in the taxes imposed on luxury cars, a step that is expected to yield the treasury NIS 500 million ($140 million) in 2020 and NIS 1 billion ($250 billion) in 2021.

New taxes on petroleum products are expected to yield NIS 450 million ($120 million) in revenue.

The lion's share of the cut – some NIS 800 million ($200 million) – has been earmarked for the defense establishment and will fund several classified projects, a ministry official said.

The Finance Ministry stressed that a substantial portion of these revenues – some NIS 350 million ($97 million) – will be earmarked for government subsidies to daycare facilities, whose high costs are a hot-button issue for many Israelis, who demand the government fight the high cost of living.

Still, a Treasury official called the move a "temporary fix," noting that NIS 350 million will subsidize daycare facilities between September and December 2019. The state budget does not account for these subsidies in the next two years, he said.

The government's deficit goal for 2020 is 2.5% and for 2021, 2%. Meeting these goals would require additional budget cuts, a senior Treasury official said.

Shay Babad, director-general of the Finance Ministry, told Israel Hayom that "we don't think these steps will solve the problem. This is just the minimal action we can take during election time and with a provisional government."

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The IMF warning comes despite the government's target deficit standing at 2.9% of the GDP, or some 40 billion shekels ($11 billion). If the IMF's forecast comes to pass, it would mean that Israel will exceed its target deficit by a sum of 10 billion shekels ($2.8 billion).

The IMF is recommending that by 2020, the new government adopt a target deficit rate of 2.5% of the GDP, which would require the government and the Treasury to slash the 2020 state budget and increase tax revenue by some 20 billion shekels ($5.5 billion).

On Friday night, the IMF unexpectedly published a summary of an IMF delegation visit to Israel from May 19-23. According to the IMF report, the fund's economists are calling Israel's increasing deficit "worrying."

The IMF economists wrote that Israel's deficit was on the rise despite a very low rate of unemployment. Even if the government makes great efforts to control expenditure, the deficit is expected to grow to 3.5% of the GDP in 2019, or possibly even more, the IMF report said.

Unless the Israeli government checks reins in spending and decreases the deficit, the country's debt-to-GDP ratio would grow for the third straight year, which would affect Israel's international credit rating, which last August reached AA-, the highest on record, the IMF warned.

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