Prime Minister Benjamin Netanyahu faces a test this month when his coalition of national and religious parties seeks approval for a spending package that the government’s budget unit says will stifle growth.
Lawmakers must approve the 2023 and 2024 budgets by the end of May to avoid an election.
Netanyahu’s coalition appears to be heading to approve the budget, given its control of 64 seats out of 120 in the Knesset.
However, economists say the spending plans could hamper the government’s fiscal targets, while the Finance Ministry itself says it could slow growth.
Israelis are already suffering from a high cost of living, and the economy has been hit by judicial amendments proposed by the government, now suspended, which have caused a political crisis, hampered investment and curtailed growth prospects.
Three economists said the government’s deficit target of 1% of gross domestic product in 2023 and 0.8% in 2024 could double or triple, which could push up bond yields.
“The forecasts are overly optimistic,” Victor Bahar, chief economist at Bank Hapoalim, told Reuters.
An official in Netanyahu’s office downplayed the concerns, saying, “The prime minister and finance minister intend to pass a responsible budget in the coming weeks that will serve all Israelis… The budget will promote stability and growth”.
The government is under pressure from months of unprecedented street protests, Western discontent with its actions and declining popularity.
It allocated 13.7 billion shekels ($3.8 billion) from “coalition funds” to fund political deals with the ultra-Orthodox, pro-settler parties on which Netanyahu’s coalition relies.
The money includes adding hundreds of millions of shekels to the allowances and schools for ultra-radical groups that cut back on non-religious subjects like math and English while their men focus on the Bible and subsist on handouts.
Ultra-Orthodox, or Haredim, make up only 13% of Israel’s population but it is a fast-growing sector and about half of its men are unemployed.
Many of them choose not to work, and those who are looking for work are often unqualified for employment.
In an unusual analysis Thursday, the Finance Ministry’s budget division said the government would roll back economic incentives to encourage ultra-Orthodox to join the labor market by spending more on yeshivas, food stamps and salaries.
The analysis said these steps would affect growth in the short and medium term, and ultimately harm “the productivity, growth, and quality of life of all Israelis”.
“Finance employees don’t understand the Haredim,” ultra-Orthodox lawmaker Yitzhak Bandros told Radio Kan.
“There will be no Israeli society, no Jewish society if there are no people who devote their lives to studying the Torah”.
Finance Minister Bezalel Smotrich said the money would remove the injustices the Haredim have been subjected to over the years, such as the fact that their children are often crowded into neglected classrooms.
He said other steps would be taken to help ultra-Orthodox find jobs.
“There is no crisis here,” he went on, referring to a fiscal surplus so far in 2023 and a responsible budget.
However, Michael Eisenberg, of the Israeli investment firm Alev, said the extra spending would fuel inflation, stifle growth and “cost Israel and the hardliners too dearly”.
Government figures already expect Israeli economic growth to decline to about 2.7% in 2023 from 6.5% in 2022, down from a forecast of 3% in January.
Credit ratings agency Standard & Poor’s expects growth of just 1.5% in 2023, and says it could slow further due to political uncertainty over the government’s now-pending campaign to limit the Supreme Court’s role in judge appointments.
Since returning to office in December, Netanyahu has sacked his defense minister over his opposition to the judicial amendments.
He stopped moving forward with it to allow talks with the opposition and faced a boycott of the vote in the Knesset by far-right minister Itamar Ben Gvir.
The judicial amendments initiative led to a decline in foreign investment and the flight of some capitals.
The shekel fell and Moody’s downgraded Israel’s rating to stable.
So far, the negotiations for judicial amendments aimed at reaching a broad consensus that would prevent further harm have not achieved the desired outcome.
Some fear that the budget will not properly account for the sharp slowdown in growth, which could cause even greater damage.
“Netanyahu sold Israel’s economy and the future of our children in order to stay in power,” said opposition leader Yair Lapid.