Finance

The Securities and Exchange Commission voted 3-2 on Wednesday to issue a final rule about climate disclosures.
The regulation requires a baseline transparency around climate risks and greenhouse gas emissions from certain U.S. publicly listed companies.
It is watered down from the initial version proposed in March 2022. So-called Scope 3 emissions were stripped out, for example.

Securities and Exchange Commission Chairman Gary Gensler testifies before Congress on July 19, 2023.
Win Mcnamee | Getty Images News | Getty Images

Climate disclosures aren’t mandatory under the current regime; companies make them voluntarily. They remain “uncommon in all but a few sectors,” according to S&P Global.
The largest companies must start making some climate disclosures as early as fiscal 2025 and about greenhouse gas emissions as soon as fiscal 2026.

‘A sensible rule to protect investors’

“Climate risk is financial risk,” Elizabeth Derbes, director of financial regulation and climate risk for the Natural Resources Defense Council, said in a written statement.
“This is a sensible rule to protect investors: it gives them access to clear, comparable, relevant information on the measures companies are taking to manage climate risks and opportunities,” Derbes said.

Overall, transparency around climate risk may be essential for investors to gauge if a company’s stock is worth holding or if its stock price is reasonable, experts said — for example, is it too expensive given high exposure to climate risk, or perhaps fairly priced considering it’s well positioned?
Required disclosures include climate risks that have had — or are reasonably likely to have — a material impact on company business strategy, operations or financial condition, according to the SEC.
They also include a company’s climate-related goals, transition plans, and costs and losses related to events like hurricanes, tornadoes, flooding, drought, wildfires, extreme temperatures and sea-level rise, the SEC said.
“Investors want to be able to accurately price those risks and opportunities as they look medium and longer term at their investments,” especially retirement investors who may have a timeline decades in the future, Rachel Curley, director of policy and programs at the U.S. Sustainable Investment Forum, recently told CNBC.

Rule does not include ‘Scope 3′ disclosures

However, the rule is watered down from its initial version. Derbes and other observers say that dilution hinders investors’ ability to accurately gauge risk.
For example, the final rule stripped out a requirement to disclose so-called Scope 3 greenhouse gas emissions. Such planet-warming emissions are those along a corporation’s value chain like suppliers of raw material or by customers using a company’s products.
For many businesses, Scope 3 emissions account for more than 70% of their carbon footprint, Deloitte estimates.

“This is not the rule I would have written,” Crenshaw said, citing omissions such as Scope 3 reporting. “They are a bare minimum,” though ultimately better than no rule at all, she added.
Instead, the final rule will require companies report Scope 1 and 2 emissions if they’re deemed material to investors. These are direct emissions caused by company operations and indirect ones from the purchase of energy (from renewable sources or coal-burning power plants, for example).
Only “large accelerated filers” and “accelerated filers” must disclose Scope 1 and 2 emissions. These categories include corporations with an aggregate global market value of $700 million or more, and $75 million or more, the SEC said.

Challenges could be forthcoming

The rule comes as the Biden administration pledged to cut U.S. greenhouse gas emissions in half by 2030. In 2022, President Joe Biden signed the Inflation Reduction Act, the largest federal investment to fight climate change in U.S. history.
It also follows other U.S. and international climate disclosure regimes, such as in the European Union and rules recently passed in California.
Congressional and legal challenges to the rule “are likely,” Jaret Seiberg, financial services and housing policy analyst at TD Cowen, wrote last week in a research note.
While proponents say the SEC rule is well within the scope of its mission to protect investors, others say the agency overstepped its authority.
The rule is “climate regulation promulgated under the Commission’s seal,” and “hijacks” the agency to promote climate goals, SEC Commissioner Mark Uyeda said before the vote Wednesday.
Last year, a group of House and Senate Republicans sent a letter to SEC Chair Gary Gensler criticizing the proposal, saying it “exceeds the [agency’s] mission, expertise, and authority.”
Gensler defended the rule as being consistent with a “basic bargain” in U.S. securities laws.
“Investors get to decide which risks they want to take so long as companies raising money from the public make … ‘complete and truthful disclosure,'” Gensler said in a written statement following the vote. “Over the last 90 years, the SEC has updated, from time to time, the disclosure requirements underlying that basic bargain.”
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In prepared remarks for appearances on Capitol Hill, Fed Chair Jerome Powell said policymakers remain attentive to the risks that inflation poses and don’t want to ease up too quickly.
“The Committee does not expect that it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent,” the central bank leader said.
Powell noted again that lowering rates too quickly risks losing the battle against inflation and likely having to raise rates further, while waiting too long poses danger to economic growth.

Federal Reserve Chair Jerome Powell on Wednesday reiterated that he expects interest rates to start coming down this year, but is not ready yet to say when.
In prepared remarks for congressionally mandated appearances on Capitol Hill Wednesday and Thursday, Powell said policymakers remain attentive to the risks that inflation poses and don’t want to ease up too quickly.

“In considering any adjustments to the target range for the policy rate, we will carefully assess the incoming data, the evolving outlook, and the balance of risks,” he said. “The Committee does not expect that it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.”
Those remarks were taken verbatim from the Federal Open Market Committee’s statement following its most recent meeting, which concluded Jan. 31.
During the question-and-answer session with House Financial Services Committee members, Powell said he needs “see a little bit more data” before moving on rates.
“We think because of the strength in the economy and the strength in the labor market and the progress we’ve made, we can approach that step carefully and thoughtfully and with greater confidence,” he said. “When we reach that confidence, the expectation is we will do so sometime this year. We can then begin dialing back that restriction on our policy.”
Stocks posted gains as Powell spoke, with the Dow Jones Industrial Average up more than 250 points heading into midday. Treasurys yields mostly moved lower as the benchmark 10-year note was off about 0.3 percentage point to 4.11%.

Rates likely at peak

In total, the speech broke no new ground on monetary policy or the Fed’s economic outlook. However, the comments indicated that officials remain concerned about not losing the progress made against inflation and will make decisions based on incoming data rather than a preset course.
“We believe that our policy rate is likely at its peak for this tightening cycle. If the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year,” Powell said in the comments. “But the economic outlook is uncertain, and ongoing progress toward our 2 percent inflation objective is not assured.”
He noted again that lowering rates too quickly risks losing the battle against inflation and likely having to raise rates further, while waiting too long poses danger to economic growth.
Markets had been widely expecting the Fed to ease up aggressively following 11 interest rate hikes totaling 5.25 percentage points that spanned March 2022 to July 2023.
In recent weeks, though, those expectations have changed following multiple cautionary statements from Fed officials. The January meeting helped cement the Fed’s cautious approach, with the statement explicitly saying rate cuts aren’t coming yet despite the market’s outlook.
As things stand, futures market pricing points to the first cut coming in June, part of four reductions this year totaling a full percentage point. That’s slightly more aggressive than the Fed’s outlook in December for three cuts.

Inflation easing

Despite the resistance to move forward on cuts, Powell noted the movement the Fed has made toward its goal of 2% inflation without tipping over the labor market and broader economy.
“The economy has made considerable progress toward these objectives over the past year,” Powell said. He noted that inflation has “eased substantially” as “the risks to achieving our employment and inflation goals have been moving into better balance.”
Inflation as judged by the Fed’s preferred gauge is currently running at a 2.4% annual rate — 2.8% when stripping out food and energy in the core reading that the Fed prefers to focus on. The numbers reflect “a notable slowing from 2022 that was widespread across both goods and services prices.”
“Longer-term inflation expectations appear to have remained well anchored, as reflected by a broad range of surveys of households, businesses, and forecasters, as well as measures from financial markets,” he added.
Powell is likely to face a variety of questions during his two-day visit to Capitol Hill, which started with an appearance Wednesday before the House Financial Services Committee and concludes Thursday before the Senate Banking Committee.
Questioning largely centered around Powell’s views on inflation and rates.
Republicans on the committee also grilled Powell on the so-called Basel III Endgame revisions to bank capital requirements. Powell said he is part of a group on the Board of Governors that has “real concerns, very specific concerns” about the proposals and said the withdrawal of the plan “is a live option.” Some of the earlier market gains Wednesday faded following reports that New York Community Bank is looking to raise equity capital, raising fresh concerns about the state of midsize U.S. banks.
Though the Fed tries to stay out of politics, the presidential election year poses particular challenges.
Former President Donald Trump, the likely Republican nominee, was a fierce critic of Powell and his colleagues while in office. Some congressional Democrats, led by Sen. Elizabeth Warren of Massachusetts, have called on the Fed to reduce rates as pressure builds on lower-income families to make ends meet.
Rep. Ayanna Pressley, D-Ohio, joined the Democrats in calling for lower rates. During his term, Democrats frequently criticized Trump for trying to cajole the Fed into cutting.
“Housing inflation and housing affordability [is] the No. 1 issue I’m hearing about from my constituents,” Pressley said. “Families in my district and throughout this country need relief now. I truly hope the Fed will listen to them and cut interest rates.”
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The gender pay gap and longer lifespans relative to men make it challenging for many women to save enough for retirement, experts said Tuesday at CNBC’s Women & Wealth event.
However, there are ways women can try to boost savings.

Momo Productions | Stone | Getty Images

Women face tough financial prospects in retirement.
About 50% of women ages 55 to 66 have no personal retirement savings, a higher share than men (47%), according to U.S. Census Bureau data. Those who do have retirement savings are less likely to have $100,000 or more (22% vs. 30%).

“The picture is pretty bleak for women” who don’t save enough for retirement, Cindy Hounsell, founder and president of the Women’s Institute for a Secure Retirement, said Tuesday at CNBC’s Women & Wealth event.

More from Women and Wealth:

Here’s a look at more coverage in CNBC’s Women & Wealth special report, where we explore ways women can increase income, save and make the most of opportunities.

Women’s retirement savings challenges

The typical woman earns a lower salary than men: about 82 cents for every dollar, according to the Pew Research Center. That gender wage gap, which has hardly improved in two decades, makes it harder to save for the future.
Meanwhile, women must stretch their savings further. A female retiring at age 65 will likely live another 21 years, nearly three years longer than men, according to the Employee Benefits Security Administration.
A retirement savings shortfall may mean women must cut back on the lifestyle to which they were accustomed to during their working years, said Marianela Collado, a certified financial planner and CEO of Tobias Financial Advisors, based in Plantation, Florida.

They may become burdens on their children if they have kids who can offer financial support, she said at the Women & Wealth event.

Compounding the problem: Caregiving, especially for a spouse, has a “more detrimental economic impact” on women, according to the National Institute on Retirement Security. The same can be said for divorce, it found.

Advice to get on track for retirement

However, there are ways women can try to bolster their nest egg.
At a high level, they can improve their cash flows by increasing money coming in (i.e., income) and decreasing what goes out (i.e., spending), Collado said.
For example, if women think they’re underpaid, they can sit down with their managers at work, inquire about opportunities for growth and find avenues for higher earning potential, Collado said. Show managers where you add value and try to get fair compensation, she added.
That may be easier to do in certain states due to growth in pay transparency laws, which require that employers disclose a salary range for job listings.

Additionally, women can do a personal spending audit on an annual basis and cut budget items that don’t add long-term value, Collado said. Scrutinize spending that’s on “autopilot,” such as automatic charges, she said.
Women should also examine their workplace benefits to determine which are applicable, Collado said.
For example, don’t leave free money on the table by not getting a company’s full 401(k) match, she said. The self-employed can also set up their own 401(k) plan. Those without any access to a workplace retirement plan can save in individual retirement accounts or other types of savings accounts, she said. More

Pan Gongsheng, governor of the People’s Bank of China, told reporters Wednesday there was room to further cut banks’ reserve requirements — the amount of cash they need to have on hand.
He was speaking at a press conference with other key leaders of the country’s economy and financial sector on the sidelines of this year’s annual parliamentary meetings.
This year, China will “continue to strengthen macroeconomic policies,” said Zheng Shanjie, chairman of the National Development and Reform Commission, the country’s economic planning agency.
At the press conference, China’s Minister of Finance Lan Fo’an told reporters the local debt situation is “controllable” overall.

China’s central bank governor said there was room to further cut banks’ reserve requirements, and pledged to utilize monetary policy to prop up consumer prices.
Bloomberg | Bloomberg | Getty Images

BEIJING — The heads of China’s central bank and economic planning agency signaled that authorities would be willing to take further steps to support growth, but did not announce any large-scale stimulus plans.
Pan Gongsheng, governor of the People’s Bank of China, told reporters Wednesday there was room to further cut banks’ reserve requirements — the amount of cash they need to have on hand. He also pledged to utilize monetary policy to “mildly” prop up consumer prices, according to CNBC’s translation of his Mandarin-language remarks.

Pan was speaking at a press conference with other key leaders of the country’s economy and financial sector on the sidelines of this year’s annual parliamentary meetings.
The leaders defended China’s growth target of around 5% for the year, while adhering to a 3% fiscal deficit.
In an annual government work report released on Tuesday, Premier Li Qiang promised to transform the world’s second-largest economy, which is facing a slew of economic challenges including a real estate slump, high levels of local government debt, deflation and weak consumer demand.
Yet, the work report fell short of many analysts’ expectations for further stimulus and raised questions about how China would be able to achieve another year of growth that’s around 5%.
National GDP rose by 5.2% in 2023, up from a low base in 2022 as China emerged from its stringent “zero Covid” measures. China’s consumer prices saw their biggest drop in January since 2009, while producer prices declined for a 16th month — underscoring the depth of the challenge that Beijing faces in reflating the world’s second-largest economy.

Still, Pan said China has ample monetary policy tools at its disposal, and pledged to push for lower financing costs in the months ahead.
The PBOC last cut reserve ratio requirements for banks by 50 basis points from Feb. 5, which provided 1 trillion yuan ($139.8 billion) in long-term capital. It was a much larger cut than analysts expected.

Boosting growth

This year, China will “continue to strengthen macroeconomic policies,” said Zheng Shanjie, chairman of the National Development and Reform Commission, the country’s economic planning agency.
He noted how this would involve coordination of fiscal, monetary, employment, industrial and regional policies, as China continues to step up macro economic policy adjustment.
“Of course, we clearly see that in the process of achieving the expected targets, there are still many difficulties and problems,” Zheng said, according to CNBC’s translation of his Mandarin-language remarks.
He noted how the “external environment may become more complex and severe.” Domestically, there may be problems in China’s efforts to remove provincial barriers to doing business by creating a “national unified market,” he added.
Zheng also said there was fierce competition in some industries, production and operating difficulties for certain businesses, as well as persistent risks in other areas. He did not mention real estate by name.
China’s Commerce Minister Wang Wentao said foreign trade faces a severe situation this year.
Zheng, the NDRC chief, said China’s exports for the January-February period increased by 10% from a year ago, but did not specific if this was in Chinese yuan or U.S. dollar terms. The next tranche of trade data is due to be released Thursday.

Bonds, debt and domestic demand

At the press conference, China’s Minister of Finance Lan Fo’an told reporters the local debt situation is “controllable” overall.
He said local government debt levels declined after his ministry’ work last year, and they are working on a longer term mechanism to resolve the issue of hidden bad debts, while seeking to defuse the issue with a range of measures.
The “ultra long” special treasury bonds announced in Tuesday’s government work report was the rare surprise and only the fourth time they have been issued since the 1990s.
NDRC chief Zheng told reporters these bonds will support technological innovation, energy securities and other key areas — which are among President Xi Jinping’s “new productive forces” spelt in the work report.
He also said policy plans for equipment upgrades will help boost consumption in the world’s second largest economy and create a market of more than 5 trillion yuan (about $694.5 billion). He said this plan would include home appliances and vehicles, among others.
China’s economy has been dragged down by lackluster consumption, as the real estate market slump, debt risks and stock market declines weigh on confidence.
Boosting domestic demand is the third-ranked task of the list of 10 economic priorities in the Chinese government’s plan for this year, underscoring the severity of the matter.
For investors in the near term, the primary concern remains how much China’s policymakers are focused on ensuring growth.
“In order to achieve this [target of around 5%], the government work report proposed many major policies,” Huang Shouhong, head of the report’s drafting team and director of the State Council’s research office, told reporters on Tuesday in Mandarin, translated by CNBC.
“If China’s economy encounters unexpected shocks in the future, or the international environment undergoes unexpected changes, we still have tools in reserve in our policy toolbox,” he said. More

China’s top securities regulator Wu Qing vowed to crack down on fraudulent investors and companies.
Wu outlined measures deemed necessary to improve the quality of listed companies, which included encouraging listed companies to improve stability, as well as timeliness and predictability of dividend payouts.
At the same meeting, China’s central bank governor Pan Gongsheng pledged support for overseas listings for high-quality Chinese companies.

Wu Qing, Chairman of the China Securities Regulatory Commission, answers a question at a press conference during the second session of the 14th National People’s Congress (NPC) in Beijing on March 6, 2024. (Photo by WANG Zhao / AFP) (Photo by WANG ZHAO/AFP via Getty Images)
Wang Zhao | Afp | Getty Images

BEIJING — China’s top securities regulator vowed to “strictly” crack down on market manipulators, while stating that protecting small investors was a “core task.”
Ensuring fairness, especially in a market dominated by smaller investors, is the regulator’s core task, said Wu Qing, chairman of the China Securities Regulatory Commission, on Wednesday at a joint press conference alongside the country’s other top economic and financial planners.

Wu outlined measures deemed necessary to improve the quality of listed companies and increase returns on investment. They include: encouraging listed companies to improve stability, timeliness and predictability of dividend payouts, stricter delisting rules, and expanding inspections of listed companies.
He said that openness, fairness and justice should be the most important principles in the capital market.
“China’s market is the second largest in the world, but it’s not as strong,” Wu said, adding the recent market volatility exposed deep-seated issues.
He said investors need to be better protected, so they can have confidence and trust. It would also attract longer term investors, he added.
At the same press conference, Pan Gongsheng, governor of the People’s Bank of China, also pledged support for overseas listings for high-quality Chinese companies.

Struggling markets

Following recent extreme market volatility, Beijing has stepped up measures to support its beleaguered stock markets in the last few weeks.
These include tightening regulatory restrictions on its rapidly booming quant trading industry and curbing short selling, changing its top securities regulator and share purchases by a “national team.”
The appointment of markets veteran Wu as chairman of the China Securities Regulatory Commission in early February preceded the curbs on quant traders.

A securities business hall in Fuyang, China, in December 2023.
Costfoto | Nurphoto | Getty Images

Wu is known as “Broker Butcher” for his crackdown on traders in his previous roles as acting vice mayor of China’s major financial hub Shanghai and chairman of the Shanghai Stock Exchange.
The Hang Seng Index, a benchmark of Hong Kong listings that includes many offshore Chinese stocks, is coming off four-straight annual losses, while the CSI300 index of the largest blue chips listed in the mainland has booked losses for three straight years.
With the mainland property market in the doldrums and the stock markets in freefall, desperate mainland investors had looked elsewhere for better returns despite stringent capital controls.
At last year’s parliamentary meeting, Beijing had announced an overhaul of finance and tech regulation by establishing party-led commissions to oversee the two sectors as Xi Jinping gained an unprecedented third term as president. More

Fed Chair Jerome Powell heads to Capitol Hill on Wednesday with markets intent on getting more clarity about how the central bank plans on proceeding with monetary policy this year.
Central to the question of how the Fed acts from here on out is its view on inflation and how Powell expresses that.
Powell’s testimony before Congress comes at a ticklish time for markets: After breaching historic highs, major stock averages have sold off this week.

Jerome Powell, chair of the Federal Reserve, during a House Financial Services Committee hearing in Washington, D.C., on June 21, 2023.
Nathan Howard | Bloomberg | Getty Images

Federal Reserve Chairman Jerome Powell heads to Capitol Hill on Wednesday with markets intent on getting more clarity about how the central bank plans on proceeding with monetary policy this year.
The past several months have seen a changing dynamic between financial markets and the Fed over the pace and timing of expected interest rate cuts this year. Markets have had to adjust their collective view from a highly accommodative central bank to one that’s more cautious and deliberate.

With his congressionally mandated testimony coming before the House on Wednesday and the Senate on Thursday, Powell will be tasked with providing a sharper view — and not rocking the boat for a nervous Wall Street.
“The question now for the market is to glean any information on when the Fed will begin employing rate cuts and how many,” said Quincy Krosby, chief global strategist at LPL Financial. “He’s not going to answer that necessarily. But if there is any change, any nuance, that is what the market wants to see.”
Central to the question of how the Fed acts from here on out is its view on inflation and how Powell expresses that. In recent weeks, he and others have expressed satisfaction with the trend in prices along with apprehension that risks still lurk, saying it’s too early to ease up on monetary policy.
Markets currently anticipate the Fed will begin cutting in June and enact the equivalent of four quarter-percentage-point cuts in total this year, according to futures market pricing gauged by the CME Group. Policymakers in December indicated three cuts and mostly have avoided providing a timetable.

Mixed signals complicate the message

On the inflation issue, the data had been cooperating for the most part.

Inflation readings in the latter part of 2023 showed a clear trend toward the Fed’s 2% target. However, January brought a jolt, showing that consumer prices, particularly in shelter costs, remained stubbornly higher and posed a threat to the trend.
Powell will have to synthesize the recent trends carefully as he speaks first to the House Financial Services Committee on Wednesday, then the Senate Banking Committee the day after.
“The message very much is not going to be ‘mission accomplished,’ but ‘we’ve made a lot of progress, we anticipate rate cuts are coming,'” said Joseph LaVorgna, chief economist at SMBC Nikko Securities. “That to me is what I think will be the central message.”
Powell’s testimony before Congress comes at a ticklish time for markets: After breaching historic highs, major stock averages have sold off this week amid ongoing concern about where rates are headed and a suddenly uncertain outlook for a few of the Big Tech names that have been driving prices higher.
Both conditions are concerning for policymakers. Big jumps in risk asset prices could reflect loose financial conditions that might cause the Fed to hold tight on policy, while a less certain environment could raise fears about staying too high for too long on rates.
Powell “cannot deviate at all from the ‘data-dependent, but we really want to cut rates’ approach the Committee has committed to,” wrote Steven Ricchiuto, U.S. chief economist at Mizuho Securities. “Sharp swings in financial conditions can easily work at cross-purposes to the Committee’s objective: maintaining tight labor market conditions while also keeping inflation expectations and long-term rates well anchored,” he said, referring to the policy-setting Federal Open Market Committee.

Political concerns

There are also other dynamics facing Powell. Several economists, including LaVorgna, see labor conditions weakening despite the apparent strength of a 3.7% unemployment rate. Also, a stunning runup in cryptocurrency prices recently suggests untethered risk-taking that could indicate too much liquidity washing around the system.
Indeed, Atlanta Fed President Raphael Bostic on Monday released an essay in which he expressed concern about potential “pent-up exuberance” that could be unleashed after rate cuts start.
“We don’t think monetary policy itself is loose, but the Fed and Powell have to wonder about this nonetheless, in view of these extant ‘remnants’ of speculation,” strategists at Macquarie said in a client note Tuesday. “The point is that small speculative frenzies that come out of nowhere should make it even more difficult for the Fed to sound dovish at this juncture.”
Finally, there are political considerations.
Along with the usual pressure that comes during presidential election years, there have been calls on the Hill for Powell and his cohorts to start cutting rates. Sen. Elizabeth Warren, D-Mass., no fan of Powell to start with, called in January for the Fed to start cutting as higher rates are especially painful for lower-income households.
They’ll get a chance to hash out the issue Thursday as Warren is a member of the Senate banking panel.
Powell needs to make “a case for why the Fed needs to address rates in anticipation of where inflation is likely to be not where it is at the moment,” LaVorgna said. “You’re going to be damned if you do, damned if you don’t. So, I think you need a very solid framework.”Don’t miss these stories from CNBC PRO: More

In the next few weeks, Binyamin Netanyahu, Israel’s prime minister, hopes to gain final parliamentary approval for an emergency war budget. It includes more cash for settlers in the West Bank, as well as for religious schools, where teenagers study the Torah rather than science—part of an attempt to unite his fissiparous political coalition. But it also contains a startling break with the past. Everyday welfare spending (long generous in Israel, owing to its socialist foundations) will be slashed to fund the country’s armed forces. The military budget will almost double from 2023 to 2024. Israel’s unwritten social contract, which has for 70-odd years promised both a generous welfare state and a fearsome military, is under threat.Despite continuing discussions about a ceasefire, Mr Netanyahu has been clear that any pause will be temporary. And even if a ceasefire ends up being extended or he leaves office, there is broad political support for a mightier military. At the same time, the war is proving more expensive than expected. Between October and December Israel’s economy shrank by a fifth at an annualised rate, compared with the previous three months—more than twice the contraction predicted by the Bank of Israel. In the same period, over 750,000 people, or a sixth of the labour force, were away from work, many of them evacuees or reservists. Last month Moody’s, a rating agency, downgraded the country’s credit rating for the first time ever. All this raises a question. Can Israel afford to wage war?The core problem is fiscal. On the eve of Hamas’s attack on October 7th, Israel’s debt-to-GDP ratio was 60%, well below the average in the OECD group of mostly rich countries. From October to December, the armed forces burned through 30bn shekels ($8bn) on top of their usual spending, an amount equivalent to 2% of gdp. And it is not just a bigger budget for the armed forces; the government is also splashing out on accommodation for evacuees, several furlough schemes and support for reservists. Israeli policymakers think that a debt ratio of 66% would be manageable. Mr Netanyahu’s budget would target an annual fiscal deficit of 6.6% of GDP—enough to produce a debt ratio of around 75%.For America or Japan such borrowing would be a breeze. In Israel, however, there is always a chance that more conflict is around the corner. Should the country’s tech industry be wounded, perhaps in a war involving other regional powers, up to a quarter of the country’s income-tax take would be at risk. The last time that Israel went into battle on the present scale, during the Yom Kippur war in 1973, its debt ratio passed 100%, which sparked a financial crisis. As the central bank printed cash, inflation rocketed to 450% by 1985 and the banking sector toppled. To keep bondholders happy, therefore, the government needs room for manoeuvre.Many now worry that Mr Netanyahu’s budget is too lavish. Although, in times of crisis, governments may borrow to keep things ticking over, they are wise to do so modestly. Given Israel’s desire to lift military spending, outgoings will not fall back to pre-war levels anytime soon. As a result, the government needs a plan to stabilise debt while spending remains high.Israel’s tax take in 2022 was worth 33% of GDP, just below the OECD average of 34%. Yet Mr Netanyahu’s budget includes only modest increases. Value-added tax will rise by one percentage point to 18%; a health tax on incomes will go up by 0.15 percentage points. Policymakers worry that raising corporate taxes would cause the tech sector, which is highly mobile and already struggling to find workers, to flee the country. Harsher taxes on households would risk depressing consumption and make life harder still for those who are already struggling because of the war.A tale of one cityIn the suburbs of Jerusalem, secular professional families, which have had members called up and seen income from businesses plummet, are suffering. Many in Arab neighbourhoods—those worst-affected by Mr Netanyahu’s budget—report no longer being welcome at work. A few miles away, though, ultra-Orthodox households, which are exempt from military service and rely on hand-outs that Mr Netanyahu wants to make more generous, have barely had to tighten their belts.The impact on industries is similarly uneven. The tech sector is bearing up reasonably well. Some firms even think they can spin a profit, benefiting from a new round of military contracts. Many have moved operations abroad, which lessens the impact of losing employees to the fight. “Our productivity actually improved,” says Chen Bitan at Cyberark, one of the country’s biggest cyber-security companies. “We told our employees the war would be won by the economy,” he explains. Although local tech investment has fallen, it has done so by about the same amount as in Europe—suggesting the war is not to blame.But the rest of the economy is in trouble. Construction is at a standstill. Farms have lost more than half their workforce. And companies involved in tourism are suffering. In January 77% fewer tourists visited Jerusalem than a year ago.The recovery could be glacial, not least because war has exacerbated longstanding problems. One is the economy’s reliance on low-paid Palestinian workers. The West Bank may import as many goods from Israel as before the war, but its 210,000 day labourers—equivalent to 5% of Israel’s workforce—cannot get out. Their permits were cancelled after October 7th, and Israel’s government is refusing to let them back in. Farms, factories and building sites lack workers. Yet many industrialists are in two minds. “We need the Palestinians, but we cannot be dependent on them,” says one.Israel’s labour market is already uber-tight. Bringing in foreign workers is slow and expensive, and the country’s workforce is less than half the size of its total population. Half of the men in Israel’s Orthodox population, which is the country’s fastest-growing group, refuse to work on religious grounds. Those who do are often woefully undereducated, having attended religious schools. Much the same is true of Arab Israelis, the community with the second-highest fertility rate. And in January new rules extended military service from 32 to 36 months for men, further depleting the labour force.Should debt continue to spiral, as the economy struggles, things will get difficult. But a repeat of what happened after the Yom Kippur war is unlikely. Israel’s ministries are stuffed with technocrats. The public is aware their security depends on a stable economy, and are liable to depose irresponsible politicians. Markets think that a default is improbable. Although borrowing is now more expensive for the government, it is far short of the eye-watering prices paid by irresponsible leaders elsewhere. Credit-default-swap rates, an indicator of markets’ trust in a government, rose from 0.5% to 1.4% after October 7th, before stabilising.Markets appear to have almost as much faith that Israel will not unleash inflation in order to reduce debt payments. The country’s annual inflation, at 3%, is lower than in America, and investors expect it to have fallen to 0.4% by the end of the year. Since the Yom Kippur war, Israel has acquired an inflation-targeting central bank, which is of a hawkish bent. After October 7th it spent $30bn in foreign reserves propping up the shekel (and has another $170bn if the currency needs more cushioning). The shekel has barely moved since.Yet even if a financial crisis is unlikely, that does not mean pain will be avoided. It will just come in a different form: through further spending cuts that are required to guarantee stability. The money that holds Mr Netanyahu’s coalition together will be protected for as long as he remains prime minister. Instead, as indicated by the war budget, Israel’s welfare state will take the hit. Despite having one of the lowest rates of unemployment in the OECD, the country is the fifth-biggest spender on unemployment benefits. Only the governments of Norway and Iceland spend more of their GDP on education. This makes a tempting target for a prime minister who needs to find savings, and has allies to protect.The welfare ministry, which is also responsible for caring for evacuees and returned hostages, will have to take an 8% cut under Mr Netanyahu’s budget—far above that faced by most other civilian ministries. The ministry has already come under fire for its lacklustre support of 135,000 Israelis evacuated from the country’s north and south. It has done little other than pay their hotel bills; now officials are reportedly pressing families to return. If Israel remains under Mr Netanhayu’s mismanagement, other ministries will experience similar treatment. Even if he steps down, however, Israel will have to make hard choices between the two pillars of its social contract: its armed forces and its welfare state. ■ More