Whoever wins Israel’s election next week must answer demands for relief from soaring housing prices and a high cost of living, but the days of big state spending on social programs are unlikely to return.
Opinion polls show that more than half of Israelis believe social issues and living expenses, which are much higher than in western Europe or the United States, are their top priorities in selecting a party on March 17.
By contrast, fewer than 30 percent say they are most concerned by the security threats facing Israel on which Prime Minister Benjamin Netanyahu - nicknamed “Bibi” - has focused his campaign.
But even a center-left bloc that is promising to ease the economic burden on citizens believes that driving up government spending is not an option.
“No way is that going to happen. That is a thing of the previous century,” said Manuel Trajtenberg of the Zionist Union that groups the Labor Party and the centrist Hatnua.
“We have to be extremely careful with the (budget) deficit. We cannot afford to run high deficits,” said Trajtenberg, a fiscal conservative whom Zionist Union has designated as finance minister should it lead the next coalition government.
Polls show Zionist Union of Labor’s Isaac Herzog, nicknamed “Bougie,” and Hatnua’s Tzipi Livni is in a tight race with Netanyahu’s Likud. However, the incumbent appears better placed to find more allies within a right-wing bloc to form the next coalition.
As in a number of European countries, the consumer price index is actually falling; it was down 0.5 percent year-on-year in January. But central bank figures for 2013 show a basket of basic products was 12 percent more expensive in Israel than the average for wealthy nations in the OECD, while gross annual salaries were $10,000 lower.
On top of this, house prices have doubled since 2007, putting home ownership out of the reach of many young Israelis, while rents are also rising sharply.
In the summer of 2011, hundreds of thousands took to the streets in protests first set off by the cost of cottage cheese, a popular staple. Those scenes have not been repeated in the cold winter weeks leading to next Tuesday’s election, but candidates have still been making reform promises.
Netanyahu, who is seeking a fourth term as premier, has addressed the cost-of-living concerns despite his focus on opposing a nuclear deal with Iran.
He has promised to eliminate an 18 percent value-added tax on basic foods. His outgoing government had already begun to allow more food imports to boost competition while passing legislation to break up conglomerates.
One challenger, centrist Moshe Kahlon of the new Kulanu party, has made no secret that he wants the post of finance minister no matter who forms the next coalition.
Kahlon, responsible for a steep drop in mobile phone rates by boosting competition as communications minister in a previous government, has proposed housing market reforms including freeing up more state-owned land for development, speeding up supply and removing bureaucratic barriers in the hope of lowering prices.
Polls suggest Kulanu will win nine seats in the 120-member parliament. If it breaks into double digits, strengthening its case for a place in the next coalition, this could make waves as Kahlon also wants more banking competition.
“If Kahlon gets double-digit mandates, it will be a short-term shock for capital markets,” said Avihay Sorezcky, chief international strategist at IBI Investment House.
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Some analysts are confident, regardless of whether “Bibi” or “Bougie” wins. “The election, no matter how it turns out, should not dampen the healthy growth and stable fiscal trajectory,” said Elliot Hentov, director for sovereign credit ratings at Standard & Poor’s.
The outgoing government’s draft budget, which has now been shelved, set the 2015 deficit target at 3.4 percent of GDP, up from 2.8 percent last year largely due to higher defense spending. Hentov expects this year’s target to be only slightly higher under a new government at 3.6 percent of GDP.
In 2003, when Netanyahu was finance minister, Israel shifted to a free-market economy. State spending was slashed in favor of the private sector driving economic growth, while the public debt burden has dropped.
Since then, Israel’s growth has been among the best in the West, but candidates looking to unseat Netanyahu say this has not helped families to make ends meet.
Trajtenberg, who supports a smaller defense budget, has unveiled a 7 billion shekel ($1.7 billion) plan to boost education and healthcare spending from 2016.
He told Reuters that as finance minister he would pursue reform under a housing “czar,” something that would not cost the government money. He ruled out new taxes, although he would try to expand the tax base and lower the salary threshold for filing a tax return.
“Regardless of who forms the next coalition, the basic macroeconomic policies such as budgetary discipline, will not really change,” said Joseph Bachar, chairman of Israel Discount Bank and a former finance ministry director general.
Eldad Tamir, chief executive of brokerage Tamir Fishman, forecast a measured approach to reform whoever wins. “I don’t see any government taking any major risks because there won’t be a big winner,” Tamir said.