"The deficit isn't pleasant, but it's not terrible," says Epsilon Investment House Ltd. in its weekly review.
The budget deficit totaled NIS 39 billion in 2012, 4.2% of GDP, more than double the government's target. The capital market had been forecasting a deficit of 4% of GDP for months, and in October, Prime Minister Benjamin Netanyahu and Minister of Finance Yuval Steinitz were recorded laughing in the Knesset when Kadima chairman MK Shaul Mofaz said that the deficit was headed for NIS 40 billion.
"It is hard not to get the impression that the source of the shock that followed the publication of the deficit is found somewhere in political and economic interests ahead of the elections," says Epsilon. "Even if it seems that we've become the present government's defense counsel on this matter (and we really are not), we have the impression that the deficit debate which developed has been blown out of proportion."
Epsilon says, "Rare is the year in which the Ministry of Finance's revenues projection (not only ours, but of every other country) materialize." It says that the mistake in the Ministry of Finance's revenues projection was more on the spending site, such as the NIS 9.5 billion defense budget overrun to NIS 62 billion. Spending on education and public sector salaries also contributed to the huge deficit.
"The following amazement now emerges: how would the astounded people have reacted had the government not responded to the social protest and not proposed even one of the measures taken in response to the protest? Why did those who are bewailing the drop in tax revenues not express their opinion on this matter when taxes were cut in previous years? There are many more points which could be raised on this matter, but we will refrain from mentioning them, because we would otherwise be suspected of being the government's lackeys."
Epsilon believes that Prime Minister Benjamin Netanyahu's credibility is in the balance, and after the elections, he will have to show the market that the government has a credible fiscal policy, or yields on government bonds are liable to skyrocket.
"Capital market veterans undoubtedly remember the U-turn in the yields on long-term government bonds in 2003, after then-Minister of Finance Netanyahu presented his economic plan. The same will happen in the coming months. If the market is persuaded that the fiscal policy presented by the next government is determined and serious, there will no effect on prices of government bonds. If not… no, there is no such scenario. Only a fool will support continuing an expansionist fiscal policy," concludes Epsilon.
Published by Globes [online], Israel business news - www.globes-online.com - on January 20, 2013
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