Political Stalemate's Economic Toll: Public to Pay While Markets Seem Unfazed

With just four days until the election, concerns are mounting over a potential political deadlock in Israel. While the stock market projects an image of calm, economists warn that repeated elections could severely impact budgets for healthcare, education, and welfare, with the financial burden falling directly on citizens. Economists are relying on Knesset research center data to estimate the potential economic fallout from a prolonged political impasse. For instance, if the 2026 budget had not passed, the state would have operated with approximately 606 billion shekels instead of the approved 699 billion, a shortfall of 93 billion shekels or 13.3% of the budget. This illustrates the potential consequences of a government operating without a new budget.

The most vulnerable segments of society, particularly lower income brackets unable to afford services the state might not provide, would be the primary casualties. The middle class would also face increased expenses for private healthcare, education, and welfare services. Consequently, political paralysis could drive up the cost of living and exacerbate social inequalities, even without direct tax hikes. Infrastructure investments could be delayed, new projects stalled, and funding for innovation and investment authorities jeopardized. The OECD has previously cautioned against broad budget cuts and urged protection for investments in education and infrastructure, areas that are particularly at risk when a government cannot set new priorities.

Conversely, a caretaker government, by necessity, imposes fiscal restraint, potentially limiting spending and reducing the deficit in the short term. However, this could lead to slower economic growth, decreased tax revenues, and higher interest expenses. Despite these warnings, the Israeli capital market is exhibiting surprising calm. The stock exchange is not reflecting fears of an impending political crisis, the shekel remains strong, and Israel's risk premium has significantly decreased. Investors appear to be anticipating a political stalemate, with some even viewing it as preferable to the continuation of the current government's term.

Economists suggest that a new government could improve Israel's international standing, strengthen state institutions, encourage investment, and support growth, potentially lowering the risk premium and strengthening the shekel. Conversely, the current coalition's continued tenure might elicit negative reactions due to concerns about strained international relations, security issues, and damage to state institutions. A prolonged period of political instability, where no bloc can form a stable government, presents a different challenge: the country functions but struggles to make decisions, approve investments, and plan for the future. This paralysis hinders major projects, discourages new business ventures due to a lack of certainty, and could lead to less positive growth and lower returns, though not necessarily a market crash, as the expectation would be for change in future elections.

The economic impact extends across various sectors. Banks might see effects on risk levels, interest rates, and regulation. Real estate could face challenges in capital raising and financing costs, alongside demand fluctuations. Housing market decisions on land marketing, building permits, and investor taxation could be delayed, impacting supply and prices. Renewable energy projects might face delays in approvals and grid connections. In the gas and oil sector, expansion and export deals depend on government decisions, though already approved activities may be less affected. Technology companies serving government offices and the defense sector could await new tenders, while the food industry's competitiveness, import costs, and public purchasing power are also relevant. Defense industries might experience delays in order approvals and procurement decisions.

Essentially, a government unable to make decisions can impact the economy without official tax increases or budget cuts. While investor uncertainty is generally disliked, leading to less entrepreneurial spirit and investment in infrastructure, the impact of a short government formation period is minor. However, prolonged instability, akin to the frequent elections between 2019 and 2022, could have a more significant economic effect, though not necessarily a stock market decline. The ultimate driver of stock performance remains company profits and investor willingness to pay for them. While the capital market might continue to profit if companies perform well, citizens requiring essential services, businesses awaiting approvals, and families needing support are directly dependent on government functionality. A political stalemate, while no longer exciting investors, could significantly strain citizens' finances and daily lives.