Senior Ministry of Finance officials warned of skyrocketing interest rate costs, due to the breach of the state budget, the economic uncertainty and the war, and said, "Increasing the budget framework could be dangerous for the economy and a negative signal to investors."
The Knesset Finance Committee today discussed the NIS 3.5 billion breach of the 2024 budget framework due to the war to allow budgets for evacuees, without a corresponding cut or tax increase to finance it. The officials voiced warnings and pessimistic forecasts.
Budget Commissioner Yogev Gradus told the Finance Committee, "We are in an unusual period. There are precedents, but not like this. Growth is very weak, the war hurt growth in 2023 and even more so in 2024. What worries us more than the figure is that we see the weakness in the GDP level, and also the composition of growth, which is the thing that worries us the most, and shows that most of the growth comes from public consumption, which shows us that it is not sustainable." In other words, business output which in the private sector has weakened greatly, and the reason this is not seen more strongly in the macroeconomic data is because of the increase in government spending due to the war.
The deficit over the past 12 months was more than NIS 160 billion
Gradus said, "We have a very high deficit. We ended 2023 with a deficit almost four times more than planned, and in 2024 we will be almost six times more than originally planned. This will affect growth."
The deficit over the past 12 months is over NIS 160 billion, which is about 8.3% of GDP. This is a very large deficit, even if according to the forecasts it is expected to be reduced by the end of the year after October 2023 is excluded from the calculations. This deficit, when the interest rate environment in the world is high, and investor confidence in Israel is low (the Ministry of Finance is already preparing for a second Moody's downgrade) - we may pay for it with extremely expensive interest."
Gradus adds that the yield spread of Israeli bonds over US bonds, i.e. how much more expensive it is for us to raise debt, is increasing: "The downgrade has effects on the loans we take. We are in a local crisis, the rating companies have already cut the rating, and there is also a negative outlook, and this is expressed in very high interest costs. Our premium is very high, and does not match the rating. Apparently the market prices the risk higher." In other words, despite the pessimism of the rating agencies, the market is even more pessimistic.
Gradus continued, "Already in the 2025 budget, which will be presented here in a few months, we anticipate higher interest costs of about NIS 7 billion compared with the period before the war. The big and expensive debt already be seen in this year's budget - about NIS 3.8 billion more expensive." This is one of the reasons Gradus was involved in a highly publicized conflict with Minister of Finance Bezalel Smotrich, who insisted on breaching the budget framework due to encouraging tax revenue data, even though the budget commissioner said a parallel cut was necessary to prevent an increase in the debt ratio and loss of investor confidence.
Consequently Gradus asked the Knesset not to take advantage of the budget breach beyond what is required, and to exercise responsibility in the 2025 budget: "We need to work in a very careful and cautious way. As we increase the spending limit, it adds debt costs." According to Gradus, there is a major need for adjustment measures, i.e. cuts and tax increases. The debt-to-GDP ratio is, he insisted, "Is one of the central parameters for the resilience of the economy. The debt is our stock for emergencies, therefore one of the important things is to keep the debt-to-GDP ratio as low as possible, in order to respond to crises. We have responded very well to crises in recent years. We explain to the rating agencies and everyone that the State of Israel has always known how to fall back to a good debt-to-GDP ratio, and we plan to do so now as well."
Published by Globes, Israel business news - en.globes.co.il - on September 11, 2024.
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