Smotrich's religious-economic concept: It could lead to a lost decade - opinion

Shortly before taking on the role of finance minister, Bezalel Smotrich outlined his economic philosophy in an interview with the haredi (ultra-Orthodox) weekly newspaper Mishpacha. In the recorded interview, which aired on Channel 12 on December 8, 2022, the incoming finance minister said: “So far the State of Israel has tried the socialist approach and the capitalist approach and failed in both. One thing we haven’t tried yet is an economic concept called ‘if, then, you obey.’”

For those who still don’t understand, Smotrich outlined the religious-economic framework he plans to implement as finance minister in the advanced start-up nation of Israel: “For the Torah tells us, ‘if, then, you obey the commandments that I enjoin upon you’ then you have economic prosperity, you have a great blessing. I also believe in an economic concept called ‘if you follow My [God’s] laws.’ If we implement the Torah, then we will be blessed with economic prosperity. This will be part of my professional approach.”

The messianic vision Smotrich presented a few days before becoming finance minister, simply asserts that it is possible to manage the economy of a modern country like Israel using a “religious method” – one that places the guidance and directives of rabbis, as well as the laws of the Torah, at the forefront. According to him, “The more the State of Israel follows the Torah, Judaism, the mitzvah of settling the land, the mitzvah of kindness and mutual responsibility, the more God will bestow upon us great prosperity and we will also have security. Therefore, I said that I want to increase the budget for Torah studies. And I repeat, ‘if you follow My laws,’ then also ‘I will give your rains in their season,’ there will be great economic prosperity and there will also be security.”

In other words, the finance minister does not consider the most pressing economic and social issues to be among the top priorities for Israel. Issues such as strengthening the security system, deepening investments in growth-generating projects, improving and promoting education, health, and transportation systems, lowering the cost of living, fighting corruption and crime in the Arab sector, and strengthening and empowering the weak, the disabled, and the needy. Instead, at the top of the finance minister’s priorities are increasing budgets for Torah studies, more Judaism and religiousness, and more settlements (or as he calls it, “the mitzvah of settling the land”).

Despite being aware of Smotrich’s religious-economic vision, which suggested that entrusting him with the Finance Ministry could potentially jeopardize Israel’s thriving economy, Prime Minister Benjamin Netanyahu did not hesitate to appoint him to that role. Upon forming the new government, Netanyahu appointed Smotrich as finance minister, entrusting him with control over the state’s financial resources.

Billions of shekels diverted towards settlements

The consequences of this decision are unsurprising. The new finance minister, whose role is to set the economic priorities for Israel, has immediately diverted billions of shekels towards settlements, ultra-Orthodox education, Torah courses, and funding for coalition partners who sustain the 64-member governing coalition.

EVEN AFTER the October 7 disaster, which required the Treasury to allocate 100-200 billion shekels for combat expenses and the evacuation of settlements, the priorities remained unchanged. The revised 2024 budget, established in April during the war, was based on an unusually large deficit of approximately NIS 125 billion, representing 6.6% of the gross domestic product.

Despite the record-breaking planned deficit, nothing has been done since then to reduce it. And when the Treasury is not acting, the deficit continues to grow. In July, the budget deficit grew to 8.1% of GDP (about NIS155b.) and may reach 10% of GDP (about NIS 190b.) by the end of the year.

The professional department heads in the Treasury are well aware of the necessary measures to reduce the deficit. However, the finance minister and the entire government are ignoring the issue and avoiding the required actions. This operates on two parallel levels: reducing unnecessary government spending on one hand and increasing government revenue through taxes on the other. To reduce spending, this could include closing unnecessary government ministries created solely to provide positions for coalition members, halting the flow of billions to coalition funds, canceling projects that do not contribute to growth etc.

To increase government revenue, measures could include raising VAT (value added tax) by one or two percent, increasing income tax for the top income brackets, canceling tax exemptions such as the exemption on rental income up to NIS 5,654 per month, the VAT exemption in Eilat, the customs duty exemption on personal imports up to $75 per transaction, etc.

The finance minister and the entire government are also neglecting the need to prepare and submit the 2025 budget for Knesset approval, despite it being just around the corner. The budget is the Treasury’s primary tool for planning economic reforms (via the economic arrangements law), reducing unnecessary spending, increasing revenue, and ensuring continued economic growth.

Unlike previous years, August is nearly over, and a draft budget has yet to be prepared or submitted to the government or the Knesset. Finance Minister Bezalel Smotrich has already stated that a budget can be prepared in two days, and in the two discussions he held with the prime minister regarding the budget, he did not involve the heads of the professional departments in his ministry.

About three weeks ago, Bank of Israel Governor Prof. Amir Yaron lost his patience and sent a stern letter to the prime minister. In it, he emphasized the urgent need to submit the 2025 budget as soon as possible, and stressed that all professional parties should be involved in its formulation, as is customary. This letter too remained unanswered. The finance minister’s irresponsible approach, ignoring all warnings and signs of an almost certain economic downturn, could damage the economy and lead to a lost decade, similar to what Israel experienced after the Yom Kippur War. This is akin to the security conception that collapsed on October 7.

Meanwhile, new and concerning data is being published daily, indicating damage to economic activity: growth is slowing; inflation is rising; housing prices are skyrocketing again; the budget deficit is at a record high; the cost of living is reaching new heights; foreign investors are avoiding Israel; the credit rating is poised to fall further; and a recession and decline in the standard of living are imminent.

The writer is head of finance studies in the business faculty of the College of Management.