The Bank of Israel today announced that the ratio of public spending to GDP in Israel will reach a new record of 54.4% this year.
According to the bank’s figures, total inflation-adjusted public spending is forecast to increase by 6% this year, double the planned increase. This rate is also higher than the 4.5% increase in 1996-2000 and exceeds international standards.
The Bank of Israel stresses that slower growth in public spending until 2000 was due to the immediate need to move the Israeli economy from crisis to stability. Large budget and balance of payments deficits jeopardized this stability. The reduction in the proportion of public spending up until the end of 2000 contributed to the lowering of inflation to single digits, a milestone first achieved in the first half of the 1990s.
The ratio of public spending to GDP fell from 55.2% in 1996 to 52.2% in 2000. This year, however, the trend was reversed. A rapid rise in public spending will propel the ratio of public spending to GDP to 54.4%, the highest rate in the past four years.
The ratio is higher than in the 20 developed countries belonging to the Organization for Economic Cooperation and Development (OECD). Israel’s rate of public spending is higher than in Sweden and Denmark (about 50%) and the large European Union (EU) countries, such as France (50%), Germany (43%), and Britain (40%).
Israel’s rate of public spending is also higher than in medium-sized EU countries, such as Belgium (46%), the Netherlands (41%), and Ireland (30%), as well as Finland (43%) and Norway (40%).
Many OECD countries that had high public spending rates, including those in the EU, reduced their rate substantially in the second half of the 1990s. The OECD average fell from 47% in 1994 to only 42% in 2001, while the rate in Israel is nearing its high level of 1995.
The Bank of Israel made clear that control of government spending is a necessary condition for reducing the tax burden, the budget deficit, and the government’s large debt and interest payments, which total NIS 30 billion per year.
The Bank of Israel also claims that loss of control over government spending interferes with the government’s ability to relieve social distress and finance infrastructure investments. “All these determine the image of Israel for local and foreign investors as an economy in which the government cannot restrain its spending. The ability of the economy to achieve its potential is consequently affected,” the Bank of Israel’s announcement said.
Published by Israel's Business Arena on August 21, 2001