The Bank of Israel said today that there is no room to change fiscal policy in the coming years, despite the increase in GDP caused by the Central Bureau of Statistics' new methodology, which also reduced Israel's debt-to-GDP ratio. Minister of Finance Yair Lapid has already promised tax cuts in 2014.
Moreover, the Bank of Israel added that major budget adjustments are still needed, including spending cuts and/or tax hikes in order to meet the legally-mandated deficit caps.
The Bank of Israel announcement cuts short the celebrations that began with the Central Bureau of Statistics' announcement about the substantial improvement in Israel's fiscal data. Today's announcement follows the Bank of Israel's bombshell yesterday, which again warned against a financial crisis if the real estate bubble bursts.
The Bank of Israel says that tax revenues are meeting the annual projection. "The fact that the deficit since the beginning of the year is below the target of 4.65% of GDP is the result of NIS 7 billion in lower spending compared with the budget, and not because of higher tax revenues," it states. The Bank of Israel's data is backed by today's Central Bureau of Statistics' forecast of stagnant economic growth and other worrisome data for 2013.
The Bank of Israel is aware that the new methodology boosted Israel's GDP in 2012 by 7%, or NIS 64 billion, which reduced the debt-to-GDP ratio from 73.5% to 68.4%. The two changes means that the growth rate in government spending, which is derived from total expenditures, will increase from 3.5% to 4% in 2015, and more slowly in the following years. To meet the mandatory spending growth caps, the government will have to cut spending by NIS 3.5 billion in a year in both 2015 and 2016.
Assuming full performance of spending in the budget and that the tax rates set in law are kept, the projected deficit in 2014 will be 4% of GDP - exactly the deficit target.
The Bank of Israel adds that if the government increases spending, the debt-to-GDP ratio will slowly rise, reaching 71% in 2020. To meet the lower deficit targets, NIS 5.5 billion in tax hikes in 2015 and NIS 9 billion in 2016 will be necessary, and/or reductions in discretionary spending beyond the adjustments required no to exceed the spending caps.
To meet the lower deficit targets of 2.5% in 2015 and 2% in 2016 that the government has set, and given the growth forecasts for these years, an additional fiscal adjustment of NIS 14.5 billion in expenditures and/or revenues will be required in 2015-16 altogether.
Published by Globes [online], Israel business news - www.globes-online.com - on September 16, 2013
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