Crude oil prices have risen 15 percent the past 10 days, fueling fears that the economy may face “stagflation,” a situation in which prices rise while the economy shrinks. Motorists face a rise of up to 10 percent in energy prices if the cost of “black gold” remains at its present level.
Finance Ministry officials who count the shekels collected in taxes would welcome the hike, which would give the government windfall profits resulting from taxes that rise with gasoline prices.However, the long-term effect could cause less tax income if inflation crimps consumer spending.
Bank of Israel governor Stanley Fischer, who was upbeat on the economy as recently as a year ago, has turned pessimistic, estimating that the economy will contract by 1.5 percent this year and grow by 1 percent in next year. By comparison, the economy was growing at a rate of more than five percent for five straight years until the worldwide financial crisis hit last year.
The government, which was sitting comfortably on a fat surplus two years ago, now is trying to grapple with the lessened revenue and increased outlays. Finance Minister Yuval Steinitz (Likud), presented an austerity budget earlier this week that already is on the way to the dustbin in the wake of opposition from the entire political spectrum, including members of his own party.
One of his proposals, a tax of 50 shekels a day on hospital patients, won’t even make it to the discussion table when the Cabinet meets for its weekly meeting on Sunday. Ministry officials are meetng with Ofir Eini, head of the national Histadrut labor union, in order to work out a compromise. Defense Minister Ehud Barak met with Prime Minister Binyamin Netanyahu Saturday night to try to convince him to drop proposed cuts in outlays for defense.
The budget focuses on financial aid to corporations with the idea of preventing more layoffs and giving incentives to create more job opportunities, but it also proposes severe cuts in social spending. Shas and Labor, key partners in the government coalition, already have served notice that they will not support the budget in its present form.
Government economists, in the United States as well as Israel, expect their economies to turn around in 2010, but the doom-and-gloomers who correctly predicted last year's collapse in the markets warn that the worst is yet to come.
They expect that the world will pay the price for the Obama government's spending program that essentially is gambling on a return to robust growth, which would provide more revenue to pay off a bloating deficit. If the crystal ball turns out to be cracked, the result would be a crash in the American dollar and the financial markets, causing another credit crisis.
The biggest winner from high oil prices may be oil-rich countries, particularly Iran. Political analysts have speculated that the fall in oil prices the past year, which has caused a loss in revenues for Iran, would adversely affect its costly nuclear development program. The switch in the trend of the cost of crude oil dampens the hopes of those who think that Iran will lack money.