Israel Faces Economic Uncertainty Amidst Government Formation Delays

The formation of a new Israeli government remains stalled, impacting the state's economic stability and leading to concerns about continued erosion of real wages. A petition filed by Kiryat Shmona against the government and Tax Authority highlights the plight of residents evacuated from the northern city, who are seeking compensation. The mayor, Avichai Stern, previously praised Prime Minister Netanyahu, but the petition suggests residents feel ignored by the current government.

The Tax Authority states that compensation eligibility for evacuated residents ended on February 28, 2025, adhering to regulations. Director Shai Aharonovich faces challenges in tax collection and cannot afford to deviate from strict rules. The authority is also considering reinstating a travel tax, which was previously abolished and reinstated multiple times throughout Israel's history, to generate an estimated 1.1 billion shekels annually, ostensibly for environmental and health reasons but seen by many as a measure to address the budget deficit.

Other proposed fiscal measures include a property tax on vacant land and online VAT collection, but these are contingent on the approval of the state budget. The delay in budget approval is expected to widen the deficit. While the Ministry of Finance is finalizing economic measures, the Tax Authority emphasizes that tax changes can only be implemented as part of the budget, making mid-year implementation difficult due to computational and retroactive taxation challenges.

Meanwhile, tax measures already announced for 2025, including the de-linking of tax brackets from the index, cancellation of credit point linkage, and increased National Insurance payments, are set to remain in effect until 2027. This will likely lead to a continued decline in real wages, though a requirement for employees to donate a vacation day for the war effort will be removed in 2027.

Minister of Finance Bezalel Smotrich's ability to act is currently limited by the Attorney General's directive, preventing him from making decisions that would bind the next government. Even essential appointments, such as the head of the Israel Land Authority, are pending. The opposition, led by Gadi Eisenkot, appears unhurried in forming a unity government, opting for a more relaxed approach instead of immediately establishing a government with the support of Arab parties.

The newly sworn-in 26th Knesset faces the challenge of approving the 2027-2028 budget, but the government's formation remains a significant hurdle. Liran Avishar Ben-Hurin has been appointed Chairperson of the Finance Committee, a move seen as positive despite potential conflicts of interest. The article criticizes the delay in forming the government, likening it to having a car but refusing to start it, suggesting that political maneuvering is hindering crucial economic decisions.