Aurelia Butler

The fallout from the Israeli government’s controversial plan to overhaul the judiciary could knock an average of 2.8 per cent annually off economic output over the next three years, the country’s central bank has warned.The battle over the plans drawn up by Israeli prime minister Benjamin Netanyahu’s hardline new government — which would significantly weaken the powers of the judiciary — has sparked the biggest wave of protests in a decade, and plunged Israel into its deepest political crisis for years.After three months of demonstrations and a brief general strike last week that closed banks, shops, ports and Israel’s Ben Gurion international airport, Netanyahu agreed to postpone the reforms to allow time for dialogue.However, several government officials have said in recent days that if no agreement is reached by the time parliament reconvenes at the end of the month, they will push ahead, raising the prospect of further protests and disruption.In a forecast released with its decision to raise its benchmark rate from 4.25 per cent to 4.5 per cent on Monday, the Bank of Israel said it had modelled two scenarios “in view of the tremendous uncertainty due to the legislative processes regarding the judicial system and their economic implications”.In the first, in which the dispute over the overhaul was smoothly resolved, the central bank forecast growth of 2.5 per cent this year and 3.5 per cent in 2024.But in the second scenario, in which the judicial changes affected Israel’s risk premium, exports, consumption and investment, the hit to GDP would be between 0.8 per cent and 2.8 per cent per year on average over the next three years.The central bank added that the second scenario was “accompanied by a higher level of uncertainty than the standard forecast, regarding the intensity and persistence of the shocks”, and that this was why it had decided to present the forecast for a single three-year block.Government officials say the changes — which would give the ruling coalition greater control over the appointment of judges and severely limit the top court’s ability to strike down laws — are needed to rein in an overly activist judiciary.

But critics — who include former and serving security officials, former central bank chiefs, technology sector executives and the political opposition — see the plans as a politically motivated power grab that will undermine checks and balances, pave the way for the evisceration of minority rights, foster corruption and damage the economy.Israel’s Start-Up Nation Policy Institute think-tank said on Sunday that venture capital investment in the country’s start-ups had dropped to $1.7bn in the first three months of the year, the lowest quarterly figure since 2018 and down from a record first quarter of $6.7bn a year earlier.The sector’s performance had been shaped by worsening global economic conditions and the battle over Israel’s judicial overhaul, it said. “While it is impossible to separate the two effects — the ongoing global recession and the domestic unrest — the combination severely jeopardises the future of Israel’s high-tech sector.” More

Higher inflation has bolstered advanced economies’ public finances, the IMF said on Monday, as it called on governments to use the windfall to cut deficits.Research published by the fund showed that the surprise surge in prices over the past couple of years helped lower debt burdens substantially.According to the IMF’s data, high inflation led the US’s net debt burden to fall from 99 per cent of gross domestic product in 2020 to 95 per cent in 2022, despite the country’s large pandemic-era budget deficits. Italy’s net debt burden fell from 142 per cent of GDP to 135 per cent.But Paolo Mauro, deputy director of the IMF’s fiscal affairs department, warned that governments should not “count” on public debt burdens falling further because of so-called “surprise” inflation. “You cannot keep surprising people,” he said, adding that fiscal authorities should lower budget deficits to help central banks bring high price rises under control.High inflation delivered a public finances windfall partly because the surge in prices in 2021-2022 was more than expected by investors. Many lost out by lending to governments at low rates of return rather than demanding higher debt costs that usually accompany higher inflation. The fund’s research estimated that an unexpected inflation increase of 1 percentage point would reduce the share of public debt in GDP by an average of 0.9 percentage points for countries with a debt burden of more than 50 per cent of GDP. Most advanced economies have debt burdens far in excess of this level. But Mauro said the benefit of inflation to taxpayers at the expense of bond holders was unlikely to be repeated.

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The shock to prices owing to supply chain problems during the pandemic — and a surge in food and energy costs across Europe after Russia’s invasion of Ukraine — is now being priced into bond markets. Yields on the US benchmark 10-year government bond have risen from 1.1 per cent at the start of 2021 to 3.5 per cent today, with similar rises across advanced economies and at all maturities of debt. The estimates were published in an analytical chapter of the IMF’s Fiscal Monitor ahead of the fund’s spring meetings next week. They also showed inflation helped bolster tax revenues, which tended to rise in line with prices. Public spending, by contrast was less sensitive to inflation and took a while to catch up. While most advanced economies increase public pensions and social security automatically in response to higher inflation, most countries did not change thresholds in their tax systems or index public sector wages to inflation. That has helped to lower government deficits around the world with a disguised increase in taxation.

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Emerging economies and the poorest economies had little indexation in their public tax or spending systems. However, they benefited less from the surprise bout of inflation owing to their reliance on dollar funding. The US currency has risen sharply in value in recent years, leaving emerging economies struggling to pay the higher costs of their debt. The IMF’s research also indicated that reducing budget deficits can help curb price pressures, with a reduction of 1 percentage point of GDP leading to a 0.5 percentage point fall in inflation. It said that fiscal policy “can help” central banks reduce inflation. “Well-targeted fiscal restraint can be designed to support monetary policy in attaining price stability while protecting the vulnerable from the cost of living crisis,” the IMF said. More

Italy is due to receive a total of around 200 billion euros ($217 billion) in grants and cheap loans through 2026, making it the EU scheme’s largest beneficiary in absolute terms.However, it is falling behind both on targets agreed with Brussels in return for the aid and also on spending money already received.”I’m not worried about the delays (on the recovery fund), we are working a lot on this,” Meloni told reporters on the sidelines of an event in Verona, blaming problems on previous governments.”I don’t take into consideration the possibility of losing the funds.”Her remarks came after Riccardo Molinari, leader of the co-ruling League party in the lower house of parliament, told the Affari Italiani news site that Italy could no longer tap some of the EU loans since it was having trouble spending them.The European Commission has frozen a 19 billion euro ($20.65 billion) fund instalment for Italy, requesting clarification over Rome’s efforts to meet the conditions linked to the money.Scope Ratings told Reuters on Monday that significant delays in Italian efforts to meet the targets in its recovery plan would likely lower the country’s medium-term growth prospects, with a negative impact for its credit rating.($1 = 0.9206 euros) More

The central bank lifted its key rate to 4.5% – its highest level since 2007 – from 4.25%. Last April, policymakers began raising the rate from 0.1% and have been aggressive during a front-loading process, but most analysts believe the tightening cycle is close to over.Despite the rate hikes, Israel’s annual inflation rate stood at 5.2% in February, slightly lower than a 14-year high of 5.4% in January but well above the government’s 1%-3% annual target range.At the same time, Israel’s economy grew a faster than expected 6.4% in 2022, although growth is expected to slow to below 3% this year amid the steep rate hikes.A Reuters poll had found that 11 of 12 economists had expected a 25 basis points move, while one other foresaw a 50 basis point hike. More