Netanyahu Budget Shores Up Coalition, but May Risk His Economic Legacy

For decades, Benjamin Netanyahu, Israel’s prime minister, has been a champion of free-market economic doctrine. As finance minister 20 years ago, he cut welfare payments, curbed government spending, sped up privatization and promoted the country’s feted tech industry.

In his autobiography last year, Mr. Netanyahu detailed how he had rescued the economy from an “antiquated semi-socialist bog,” in part by cutting handouts to ultraconservative Jewish Israelis, who often eschew the job market for religious study.

Mr. Netanyahu’s new national budget, which was passed by the Israeli Parliament early on Wednesday, risks turning that legacy on its head.

Bending to the demands of his ultra-Orthodox partners in a shaky coalition government, Mr. Netanyahu massively increased state funding for privately run ultra-Orthodox schools, seminaries and other religious and social projects, as well as for ministries run by Israeli settlers in the occupied West Bank.

Mr. Netanyahu said the increases were necessary to ensure parity between religious and secular school systems. But critics said his move would cause long-term harm to Israel’s economy because it bolsters an ultra-Orthodox school system that largely does not teach math, science and English, leaving children unprepared for the modern workplace.

Mr. Netanyahu’s stance on the issue has caused a storm in Israel, raising tensions between ultraconservative believers, who want to preserve their autonomous lifestyle, and their secular neighbors, who argue that their taxes are increasingly being spent on a part of the population that provides little in return and largely avoids military service.

The debate led one secular television presenter to describe the ultra-Orthodox as “bloodsuckers,” while religious leaders said their communities’ volunteer work for charities and emergency medical groups had gone unappreciated.

The standoff is part of a wider dispute about Israel’s character, one also seen in the struggle around the government’s plan to reduce judicial influence. The plan is overwhelmingly backed by the ultra-Orthodox, who see the courts as a threat to their lifestyle, but generally opposed by secular Israelis, who see the judiciary as a protector of their freedoms.

And the furor over the budget has also undermined the free-market credentials of Mr. Netanyahu, who as finance minister received praise from Milton Friedman, the godfather of neoliberal economics. The prime minister faces accusations that he is making economic decisions based on political expediency.

“It appears that the Netanyahu of 20 years ago and the Netanyahu of today hold opposing economic values and agendas,” said Prof. Karnit Flug, a former governor of the Bank of Israel who is now vice-president of the Israel Democracy Institute, a Jerusalem-based research group.

Ultra-Orthodox Jews, or Haredim, are the fastest-growing part of the Israeli population: They currently form about 13 percent of citizens, a proportion that is projected to triple within four decades. Economists say this rise will cost Israel trillions of dollars — unless the largely autonomous ultra-Orthodox school system prepares Haredi children better for the world of work, and more Haredi adults are encouraged to work instead of studying in seminaries.

Israel’s new budget does the opposite. It increases the annual state funding for seminaries, or yeshivas, and stipends for students in those institutions by at least 50 percent, or more than $160 million, according to an assessment by analysts at the Berl Katznelson Center, a political research group. And it more than triples the annual state funding for Haredi schools, a rise of more than $400 million, according to the same analysts.

Asked to comment for this article, the prime minister’s office said the increases would stimulate, not hinder, Haredi participation in the labor market, and would create parity between state funding for Haredi schools and secular ones.

“Religious children should have the same opportunities that secular children have,” the prime minister’s office wrote in a statement. “This is an important step toward social cohesion and inclusivity.”

The statement added that the budget was “in line with Prime Minister Netanyahu’s free market principles that helped unleash Israel’s economy two decades ago and turned it into an innovative and economic power. Prime Minister Netanyahu remains committed to these principles.”

But economists are unconvinced, including within both the finance ministry and a right-wing research group that is otherwise broadly supportive of Mr. Netanyahu.

Israeli governments, including previous administrations led by Mr. Netanyahu, funded Haredi education for years, as well as secular schools and colleges. But such a large increase to that funding has spurred alarm.

In an internal government assessment published in the Israeli news media, a senior economist at the finance ministry warned that, even before the new budget was passed, the sluggish employment rates among Haredim would cost Israel’s economy nearly $2 trillion over the next four decades. Israelis in the work force would face income tax rises of 16 percent to maintain the current level of government services, the assessment said.

That report prompted concern even from the Kohelet Forum, a right-wing research group that has strongly backed the government’s other flagship project, the judicial overhaul. Kohelet’s lead economist, Michael Sarel, released a statement that supported the Haredim’s right to live “according to their preferences,” but criticized the government for creating “very wrong economic incentives for ultra-Orthodox families.”

Three hundred economists from across the political spectrum then made a joint call for the government to “come to its senses,” warning that the budget would “transform Israel in the long term from a progressive and prosperous country to a backward country where a large part of the population lacks basic skills for life in the 21st century.”

Mr. Netanyahu’s allies say the storm over ultra-Orthodox education has been overhyped by a hostile news media.

“The budgets for Haredi education constitute maybe half a percent of the entire budget,” Bezalel Smotrich, the finance minister, said in a speech to Parliament on Tuesday night.

But “99 percent of the reporting will be about the budget for the Haredim, and less than half a percent will be about the rest, because they do not want you to know the truth,” he added. “This budget is good for all the citizens of Israel — left and right, religious, ultra-Orthodox and secular, Druze, Arabs.”

The entire budget covers all state spending, including on the military, transport and infrastructure, and will provide ministries with roughly $270 billion over two years. Among other measures, it has increased funds to the national security ministry, led by Itamar Ben-Gvir, a far-right former activist, and set up a new food stamp program.

The government also said the budget would help bring down the cost of living, a claim disputed by the opposition.

In his memoir last year, Mr. Netanyahu wrote that he had been prepared to cut subsidies and maintain fiscal discipline in the 2000s because “I was willing to risk my political future for it.”

Now, political commentators say that is no longer the case. Mr. Netanyahu’s four-seat majority in Parliament is dependent on two ultra-Orthodox political parties. If they had voted against the budget, as some of their leaders threatened, the government would automatically have fallen, setting the stage for new elections.

“Survival — that sums it up,” said Anshel Pfeffer, a biographer of Mr. Netanyahu.

“Netanyahu’s belief in the absolute necessity of his being Israel’s leader is far deeper than his belief in fiscal conservatism,” Mr. Pfeffer said. To retain power, “he is willing to pay the price in the shape of a budget that betrays all the economic principles he believes in.”

Gabby Sobelman contributed reporting from Rehovot, Israel, and Myra Noveck from Jerusalem.