Israel's general election has inaugurated a round of political horse-trading after the ruling Kadima party unexpectedly defeated the even more right-wing Likud.

Kadima, led by Foreign Minister Tzipi Livni, finished first in the poll, securing 28 seats in the Knesset, the Israeli parliament, compared with 27 for Likud, led by Binyamin Netanyahu. Both are seeking to form coalitions that will give them more than 60 seats in the 120-seat Knesset. President Shimon Peres will be responsible for deciding whether Livni or Netanyahu is most capable of forming a coalition.

The final result cannot be predicted with certainty, but with 99.7 percent of votes counted it appears that the right-wing or nationalist bloc of parties will control 63-64 seats, while the so-called center-left bloc will hold 56-57 seats. There are some 150,000 eligible absentee voters yet to be counted, mainly soldiers and Israeli emissaries abroad. The final tally will be published on February 18, but soldiers generally vote more strongly for the right-wing parties.

The election was called following Prime Minister Ehud Olmert's resignation in the wake of multiple corruption scandals and the failure of Livni, his successor as head of Kadima, to form a coalition.

The role of kingmaker in any coalition falls to the far-right Yisrael Beiteinu, led by Avigdor Lieberman, which is being courted by both sides. Yisrael Beiteinu would still be the linchpin even in the event of a national unity government formed by Kadima and Likud.

The other political certainty is that the eventual ruling coalition will pursue a militarist agenda combined with policies of economic austerity.

The election result is an expression of a profound political and social crisis gripping Israel. It testifies to a significant shift to the right in official politics, which is most clearly seen in percentage terms due to Israel's complex voting system.

Likud's share of the vote grew from 8.9 percent in 2006 to 21 percent in this election. The other major gain was registered by Yisrael Beiteinu, with an increase from 8.9 percent to 12 percent. Likud would have probably been the clear victor had it not lost votes to its far-right rival.

The growth of the right-wing and far-right parties is the most acute expression of a more general shift across the political spectrum. Kadima, with a 1 percent rise in support, did better than expected because it attracted voters from Labour and Meretz who sought by voting for Livni to prevent the formation of a solid rightist bloc consisting of Likud and Yisrael Beiteinu.

Labour suffered a collapse, pushed into fourth place by Yisrael Beiteinu which won 15 seats to Labour's 13—down from 19 in 2006. Labour's share of the vote declined from 15 percent to just 10 percent, while Meretz, which presents itself as being to the left of Labour, lost just under 1 percent of its previous vote and was reduced to three seats in the Knesset.

The media generally speaks of this as a collapse of the "left"—i.e., those supposedly willing to seek an accommodation with the Palestinians—but such a designation is all but meaningless. Lieberman's rise to prominence and the growth of support for Netanyahu and Likud have been prepared by Israel's murderous assaults, first on Lebanon in 2006 and more recently on Gaza.

The attack on Gaza was instigated by Livni, with Labour leader Ehud Barak serving as her defence minister. Meretz gave its full support, just as it did in the war on Lebanon. Netanyahu praised the outgoing government, complaining only that the attack on Gaza was called off and "did not allow IDF [Israeli Defence Forces] soldiers to finish the job."

Lieberman's main campaign slogan, "No loyalty, no citizenship," was a demand that Arab Israelis, who make up 20 percent of the population, be forced to take a loyalty oath to the state or lose their right to vote. The precedent for this was set during the Gaza campaign, when Israel's Central Elections Committee barred Israeli Arab parties from running in the general election, with the support of both Kadima and Labour. This was only overturned by an appeal to the Supreme Court.

Netanyahu described the demand as "legitimate," while Livni embraced the issue obliquely by insisting that all Israeli citizens, including Arabs, should be obliged to enlist for military or national service.

Barak refused throughout the election campaign to rule out a coalition with Yisrael Beiteinu.

Following the election, the Jerusalem Post cited a Kadima official as saying that "Yisrael Beiteinu was more of a natural partner than Likud, and that Lieberman's party was ‘not really in the right-wing bloc.' " The quote continued: "They are not on the right on the issue of a two-state solution. They support that solution, but they want a land swap.... Lieberman is pragmatic and he can definitely be in the coalition."

Lieberman's "land-swap" is a policy of ethnic cleansing—to change Israel's borders to include illegal settlements on the West Bank while transferring Israeli areas with a high Arab population to a truncated Palestinian state.

The collapse of Labour, the party that founded the state of Israel, has major historical and political significance. It is proof of the impossibility of any longer pursuing the nationalist project of Zionism while advocating liberal or social democratic policies and a peaceful resolution of the Palestinian conflict. Labour has become ever more nakedly a party of war and social reaction, to the point where Ha'aretz columnist Doron Rosenblum wrote despairingly, "One thing is clear: Since the implosion of the Camp David talks, the Labour Party, under the inspiration of Ehud Barak, has become the most efficient, industrious entity to carry the water for the right-wing agenda on all practical matters, from settlement expansion to the rejection of peace negotiations to the launching of military operations."

The election also witnessed the virtual collapse of protest parties such as the Pensioners Party, which in 2006 had seven seats, and the Green Movement-Meimad. Both won just 1 percent of the vote, failing to meet the 2 percent threshold needed to gain a Knesset seat.

Lieberman did not do as well as expected, having been projected to win 20 seats. But he remains the main beneficiary of the political crisis gripping Israeli society, under conditions where acute social and political tensions can find no progressive direction.

The bedrock of Yisrael Beiteinu's support is amongst 1.25 million Russian Jews. Often highly educated and secular, they nevertheless endure poor job prospects, poverty and discrimination. Lieberman has successfully exploited the resulting resentments, calling for a programme of public works to tackle unemployment and portraying himself as the advocate of "working class men and women who care about their country" and "are being asked to sacrifice without getting what they deserve in return."

But his scapegoating of Arabs for Israel's social ills has begun to find an audience more widely, most disturbingly amongst a layer of young people in the high schools and universities who also face poverty and poor employment prospects.

Those within Israel opposed to such right-wing nostrums, and who reject the claim that Kadima, Labour or Meretz represent an alternative to Likud and Yisrael Beiteinu, were politically disenfranchised.

The media has made a great deal of a 2 percent rise in voter turnout over the record low of 2006, but this still means that more than a third of the electorate—mainly young people, secular Jews and Arab Israelis—did not cast a ballot. This broad political alienation creates a crisis of legitimacy for any government that might be formed.

Jerrold Kessel and Pierre Klochendler wrote in the Inter Press Service: "Some political analysts are alarmed that the system is dangerously close to becoming dysfunctional. It could well happen that Israel will be led by a prime minister who will have garnered well under 25 percent of the popular total vote."

Ben Kaspit wrote in Ma'ariv: "Woe unto this government, woe unto Israel. Not because of Netanyahu or his qualifications; because of the system; because of the stalemate; because of the dead end."

Nahum Barnea noted in Yediot Aharonot: "Only 54 percent of the Arab sector voted yesterday.... The decline in the rate of participation in voting indicates the dwindling affinity of Israel's Arabs to the state, and this trend is dangerous."

The election was almost exclusively dominated by what is habitually referred to as the "security issue." Little was said about the impact of the global economic crisis on Israel. Yet the most explosive factor in the destabilisation of Israeli society today is the extraordinary degree of social polarisation.

Business Week points out that the income gap between rich and poor in Israel is "the widest of any Western country."

The number of Israeli millionaires per capita is twice the world average. In contrast, more than 1.6 million Israelis out of 7 million live in poverty, including 800,000 children—one in three. Fully 42 percent of Israeli Arab families live below the poverty line, and those in poverty make up nearly 45 percent of the working population.

This is set to worsen. Israel's economic growth came to a standstill at the end of last year, and the country is expected to enter a recession this year. Exports, on which Israel depends, have fallen by more than 20 percent and industrial production by 6 percent. Thousands have been made redundant in the high-tech industries that account for more than 40 percent of Israel's industrial exports. Unemployment is expected to rise from 5.9 percent to 8 percent by the end of 2009.

Both of the major parties are in favour of handing over billions to the banks and corporations, while Netanyahu wants to lower taxes on the highest earners and reduce the top corporate rate from 27 percent to just 18 percent. Whichever coalition is eventually formed, it will impose economic and social measures that will drive hundreds of thousands into penury.