Coalition Partner's Demands, Not Leader's Identity, Drive Israel's Fiscal Policy

President Isaac Herzog has begun coalition consultations following the recent elections, with no bloc yet securing the required 61 seats. Even before the talks commenced, United Torah Judaism presented its primary condition: a law exempting yeshiva students from military conscription. Meanwhile, Gadi Eisenkot reportedly indicated a willingness to consider a government formed without the participation of United Torah Judaism and Ra'am.

This political maneuvering occurs against a backdrop of significant economic challenges. Israel has experienced three years of substantial deficits, exceeding 5% of GDP, and its debt-to-GDP ratio is projected to rise from 60.3% in 2022 to approximately 69% by 2025, according to the International Monetary Fund. The Governor of the Bank of Israel, Professor Amir Yaron, recently emphasized the need for fiscal prudence due to geopolitical uncertainty, urging a reduction in growth-hindering expenditures. Consequently, the fiscal policy of the next government will be crucial in determining Israel's preparedness for future crises.

The public discourse has largely focused on individual leaders like Netanyahu, Eisenkot, and Liberman, framing the election as a referendum on a single figure. However, an analysis of Israeli governments from 2009 to 2025 suggests that coalition structure, specifically the indispensability of certain partners, has been a more significant driver of fiscal populism than the prime minister's identity. Four governments, all led by Netanyahu and including the Haredi parties, were classified as fiscally populist. In contrast, two governments, both formed without the Haredi parties, were not. This pattern aligns with economic research indicating that governments reliant on coalition partners who can veto spending cuts or demand additional allocations tend to run higher deficits, as the budget becomes a collection of demands rather than a national plan.

Historical precedents offer insights into potential coalition configurations. A unity government in 2013 involving Netanyahu, Lapid, and Bennett, without the Haredi parties, demonstrated fiscal responsibility, improving the structural budget balance and limiting coalition commitments. However, the article cautions that unity alone is not a guarantee, as a coalition partner essential for a majority can still exert significant influence. The potential inclusion of Ra'am presents another scenario; while the Bennett-Lapid government, which included Ra'am, achieved a budget surplus and implemented reforms, its current configuration would involve a minority government dependent on abstentions, a situation economists have warned could lead to increased deficits.

The inclusion of Haredi parties, however, shows a consistent pattern of fiscal populism. In the current 37th government, coalition commitments reached their highest point since 2015, with a significant portion directed towards Haredi sectors. The article highlights that in a coalition of exactly 61 seats, the negotiating power of an indispensable partner, such as the Haredi parties, would be at its peak. The author concludes that the fiscal test for the next government will not be its leader but rather the presence of a party capable of collapsing the government and the price it will demand for its continued support. This cost, the article stresses, will ultimately be borne by all taxpayers.