New GDP methodology means lower taxes possible

The new methodology boosted GDP for 2013 by NIS 66 billion, from NIS 964 billion to NIS 1.03 trillion.

A brief conversation with Chief Statistician Prof. Danny Pfefferman, the newly appointed director of the Central Bureau of Statistics, about the change in the methodology for calculating GDP could save the country a lot of money and save Minister of Finance Yair Lapid headaches and political capital. On the eve of Rosh Hashana, and without any organized briefing, the Central Bureau of Statistics changed its methodology and components of GDP.

GDP is a critical macroeconomic figure and the change in the methodology is nothing short of a revolution: the new methodology boosted GDP for 2013 by NIS 66 billion, from NIS 964 billion to NIS 1.03 trillion; and boosted GDP for 2012 by NIS 64 billion, or 6.9%, from NIS 929 billion to NIS 993 billion.

The changes made by the Central Bureau of Statistics include adding investment in R&D to the intellectual property products item (formerly intangible assets). This item alone was enough to boost GDP by 2%, or NIS 20 billion, a year, accounting for a third of the total jump.

Another major change was the removal of financial brokerage services (which indirectly to the final uses of private consumption, public consumption, and imports and exports), which boosted GDP by another 1%, or NIS 10 billion, a year. This is income that banks collect on the interest rate spread from households and businesses, but not from commissions, which are measured separately and directly, and which totaled an additional NIS 13.4 billion in 2012.

These two items alone account for half the increase in GDP in 2012. Dozens of other small changes also contributed to the change in GDP. It should be emphasized that the changes in methodology are unrelated to Israel's gas discoveries or any of the huge recent high-tech deals, but are permanent changes that will always boost GDP.

The changes in methodology affect all other macroeconomic variables, including fiscal variables that made headlines in the past year. The most important of these are the deficit and debt: two critical variables that are also measured as a ratio to GDP.

The new GDP figures means that the harshly criticized deficit-to-GDP ratio was 3.9% in 2012, not 4.2%. More importantly, the debt-to-GDP ratio fell from 73% to 67%. Israel has set a debt-to-GDP ratio target of 60% in 2020, which now definitely seems achievable.

Lapid is the winner

Ministry of Finance officials, especially those who have already left the ministry and were identified with former minister Yuval Steinitz, say that the changes and new numbers are revolutionary. But the big winner of the new methodology is Steinitz's successor, Lapid. He calculated the fiscal targets, especially the deficit targets for the next two years, on the basis of the old GDP figures. Now, NIS 2.3 billion has been freed (assuming that GDP will be 3.8% in 2013, which is quite possible).

Not only is Lapid already meeting his deficit target, the plunge in the debt-to-GDP ratio means that he can keep his promise to lower taxes in 2014, because of the permanent increase in GDP.

This is the second time in as many years that the Central Bureau of Statistics has made a major change in its methodology and completely transformed Israel's macroeconomic picture. 18 months ago, it announced that Israel's unemployment rate was not 5.4% (at the end of 2011), but 6.5% - a 20% increase in the unemployment rate. The change shocked and even infuriated Israel's top economists, including then-Governor of the Bank of Israel Stanley Fischer, who said more than once that the new figures were problematic.

This time, the changes in methodology are positive, and have far-reaching political and policy consequences. It should be noted however, that other OECD member states are changing, or have already changed, their methodologies, which means that the improvement in Israel's debt and deficit rankings will narrow.

Published by Globes [online], Israel business news - www.globes-online.com - on September 8, 2013

© Copyright of Globes Publisher Itonut (1983) Ltd. 2013

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