Kahlon's legacy: Huge deficits are the new normal

Amiram Barkat

Israel's finance minister prefers listening to people who tell him forecasts are just scaremongering than to his professional economists.

It may be surmised that Minister of Finance Moshe Kahlon would readily have foregone the survey of the economy presented to the government by Ministry of Finance officials. The figures showing growth of NIS 9.8 billion in the fiscal deficit in 2019 and a fiscal hole almost double that in 2020 - NIS 17.4 billion - are not the leaving certificate that Kahlon would have chosen as this government's term comes to a close. The headlines on the fiscal hole that the minister of finance is leaving behind are causing him considerable political damage. For now, it's hard to know what Kahlon thinks about this; he has wrapped himself in silence.

Last week, the minister of finance was quick to respond to the 2018 deficit figures, and even published them himself ahead of time. But so far there has been no response from Kahlon to the gloomy figures for 2019. Sources close to him say that he is skeptical about them. Other Ministry of Finance sources, who were not involved in preparing the survey, told him that the forecast was too pessimistic, that the officials only know how to be scary - and Kahlon prefers to believe those who whisper in his ear and not his ministry's official economists. Up to now, it hasn't worked badly.

Kahlon of course knew in advance about the worryingly large deficit expected this year. For weeks, senior Ministry of Finance officials have been busy with discussions on the revenues forecast, which underwent many revisions and facelifts before being published last week. Ministry of Finance director-general Shai Babad, who led the discussions, maintained a high level of secrecy, and would not allow even deputy heads of departments to take part.

Kahlon, however, already knew which way the wind was blowing two months ago when he insisted in media interviews that 2019 would be a good year for the Israeli economy. Kahlon's line of defense is that no-one can know what the future holds, and that in fact all the pessimistic forecasts sounded during his term as minister of finance had turned out to be exaggerated. In a meeting of his Kulanu party in the Knesset, Kahlon spoke of huge investment that would flow into the economy this year, and of all kinds of surprises that it was too early to reveal.

But the survey presented by the Ministry of Finance to the government yesterday showed that everything that had happened in the previous three years was a succession of one-time positive events: surplus revenues from real estate in 2015 (because of the rise in purchase tax); surplus revenues from vehicle taxation in 2016 (because of the "green tax" reform); surplus income tax revenues in 2017 (thanks to the sale of Mobileye and the Tax Authority's collection campaign). 2018 was the first year in which there were no positive surprises in the economy, and only huge efforts by the Accountant General and others at the Ministry of Finance made it possible to keep the deficit that year below 3% of GDP.

All this is leading up to one simple thing: the huge deficit projected for 2019 is only a symptom of the problem. A deficit of 3.5% of GDP is the new normal, what is known as the government's structural deficit, in which there are no surprises, whether positive or negative. Add in, for example, limited military hostilities or lower-than-forecast growth, and watch the deficit rise easily to beyond 4% of GDP.

According to the Ministry of Finance's forecast, in 2020 the deficit will be 3.7%. In 2021 it will be 3.6%, and in 2022 it will moderate slightly to 3.3%. It's hard to believe that economic growth in the coming years will reduce these numbers, which means that the trend of falling government debt as a proportion of GDP, the greatest achievement of Netanyahu's governments since 2003, will be reversed. Reversal of the decline in the debt ratio will lead to a reversal of the trend of an improving credit rating for Israel by the international credit rating agencies. Israel's debt will become more costly to service, leaving less money for government spending, and the deficit will continue to expand.

We don't know who will be the next minister of finance, but he will clearly have to introduce measures that Kahlon did not dare to introduce. Before he even starts to think about spending cuts, however, the minister of finance must give credence to his professional staff, even when it's unpleasant, and not be tempted by all kinds of siren voices that only tell him what he wants to hear.

Published by Globes, Israel business news - en.globes.co.il - on January 14, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

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