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Israeli Politics

Judicial Reform Will Cost Israel Billions

Shekel NIS

Warnings that the judicial reforms proposed by Prime Minister Benjamin Netanyahu’s government will greatly harm Israel’s economy are now supported by Israel’s own Ministry of Finance. The ministry’s Budgets Division head Yogev Gardo released an official report on the matter that states the reforms will cause a downgrading Israel’s sovereign credit rating which could lead to a 5.6% loss in economic growth.

This basically confirms what Israel’s opposition leaders have been saying.

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Massive protests have rocked Israel over the past few months, ever since Justice Minister Yariv Levin revealed the government’s plans to alter the nature of Israel’s judicial system. The government’s judicial reform plan would greatly curtail the power of Israel’s Supreme Court to nullify legislation passed by the Knesset and also limit the authority of Israel’s attorney general. The opposition charges this would harm Israel’s democracy, eroding foreign confidence in the country and hurting its economy. And this is why the country is now on the brink of what some are describing as the biggest societal clash in Israel’s history.

According to the report from the Budgets Division, “As far as economic growth is concerned, a rating downgrade will be liable to lead to a rise in the government’s expenditure on interest and to higher financing costs for the private sector and slower growth. The burden of financing the public debt will rise by between NIS 2.3 billion ($630 million) and NIS 6.8 billion ($1.86 billion) at full maturity.”

The report added that this loss of product will lead to a loss of revenues within about a decade of NIS 15-30 billion ($4.1 – $8.2 billion), given the current tax burden,” it states.

The chief economist at the Ministry of Finance Shira Greenberg wrote in a position paper on the matter that any damage to Israel’s rating in the areas of democracy and governance, “can be expected to lead to a structural decline in the rate of growth per capita of about 0.8% annually.”

Greenberg said this means that over a period of five years following the passage of the judicial reform plan Israel can expect a cumulative loss of product of NIS 270 billion ($74 billion) along with a cumulative decline in state revenues of NIS 70 billion ($19.1 billion), and after a decade, she said, the cumulative negative effect on state revenues is estimated to be NIS 385 billion ($105 billion) over the following five years.

“The damage to state revenues,” she said, “is liable to begin to manifest itself as early as the fiscal years immediately after the implementation of the reform, and therefore if the proposed legal reform is implemented in the near future, it can be expected that the revenues forecast for the coming budget will need to be revised.”

“It should be made clear that the structural decline in the rate of growth of per capita GDP of 0.8% annually,” explained Greenberg. “On the basis of which the estimate in this paper is made, could turn out to be conservative, as it does not take into account the level of higher education in Israel and the structure of the Israeli economy, which to a considerable extent rests on the high-tech sector, which is a mobile sector and largely dependent on foreign investment.”

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