Rating agency Fitch Ratings has given a qualified welcome to the Israeli government's austerity measures, designed to curb Israel's fiscal deficit. "The Israeli government’s move to increase revenue and cut spending is positive, although the measures are unlikely to be enough to meet its 2012 headline budget deficit target of 2% of GDP, while next year’s recently increased target of 3% is also at risk," Fitch Ratings says.
Analysing Israel's deficit and debt levels, Fitch states, "High public debt is the main constraint on Israel’s ‘A’/Stable sovereign rating. At 74.2% of GDP in 2011, general government debt is considerably higher than the ‘A’ ratings group median (48%), and will remain so if, as our growth and deficit forecasts suggest, it stabilises at around that level over the next two years.
"Last year’s central government budget deficit widened to 3.3% of GDP from 3% the previous year, and outside the government’s 3% target. Falling revenues, partly due to the cancellation of planned increases in excise taxes on gasoline and coal, were to blame. A slowing economy has put fiscal targets under further pressure this year."
Fitch notes the cabinet's approval of a one percentage point rise in VAT, to 17%, an increase in income tax of one percentage point on salaries above NIS 8,881 ($2,226) a month, and public spending cuts of 5% for 2012 and a further 3% in 2013, following an increase in taxes on alcohol and tobacco imposed last week. The rating agency also notes Governor of the Bank of Israel Stanley Fischer's welcome for the package, and comments, "A commitment to fiscal tightening could give the Bank of Israel, which left rates unchanged at 2.25% last week, room to ease monetary policy further, potentially supporting the Israeli economy."
"Nevertheless," it adds, "the government’s 2% deficit target for 2012 still looks unrealistic. When we affirmed Israel’s ‘A’ rating with Stable Outlook on 25 April, we forecast a headline budget deficit of 3.7% of GDP as economic growth slows (the general government deficit is generally at least a percentage point higher). The new measures, equivalent to around 1.8% of GDP, will have their main impact next year.
"Last month, Israel raised its 2013 deficit target to 3% of GDP from 1.5%. This was in line with our view that the original 1.5% target was unrealistic and would need to be revised.
"A positive rating action on Israel would require the debt/GDP ratio to fall nearer to the government‘s 60% target. Conversely, a prolonged rise in the ratio and/or sustained fiscal easing would prompt a negative rating action," the Fitch review concludes.
Published by Globes [online], Israel business news - www.globes-online.com - on August 1, 2012
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