Bank of Israel: Gov't budget cuts insufficient

Minister of Finance Bezalel Smotrich credit: GPO
Minister of Finance Bezalel Smotrich credit: GPO

The Bank of Israel research department believes that the coalition funds should be canceled.

A special survey by the Bank of Israel has determined that the budget cuts implemented by government so far in the 2023 budget are insufficient. Bank of Israel research department head Dr. Adi Brender wrote, "The security situation requires great responsibility in management of the government's budget policy in order to establish the confidence of the markets, which examine the developments in the economy, including the budget."

In other words, the Bank of Israel understands that there is a need to change the priorities in the budget, while preventing planned expenses that are not necessary (such as the coalition funds).

The Bank of Israel is calling on the Ministry of Finance to discuss the 2024 budget immediately, examine the coalition funds and announce a cut. An examination of the budget items, they say, indicates possible reductions of about NIS 8-10 billion in 2024.

"Major importance in the government already halting new spending"

In practice, the Bank of Israel is criticizing the activities carried out so far by Minister of Finance Bezalel Smotrich and which were approved last night by Prime Minister Benjamin Netanyahu, by saying that the proposed NIS 4 billion budget cut, "is not large, and as such its contribution to strengthening the credibility of the government's commitment to fiscal adjustment for the costs of the war is limited."

The Bank of Israel estimates that the total fiscal cost of the war in 2023 will not amount to just the NIS 35 billion currently allocated by the Minister of Finance (NIS 22 billion for security and NIS 13 billion for civilian expenses).

The Bank of Israel stresses that the total cost will be greater than this amount, and the government also has expenses that will be financed through the compensation fund, expenses that include, among other things, direct damage to property, indirect damage to businesses up to 40 kilometers from the Gaza Strip, to the Golan Heights settlements and settlements along the line of conflict in the north, as well as business grants in the rest of the country. The bank explains that these costs are estimated at about NIS 15 billion already in 2023, an amount somewhat lower than the total balance of the compensation fund on the eve of the war.

Since the fund is expected to be almost fully utilized by existing obligations, as more expenses of this type are required later this year or in 2024, the government will have to finance them from its budget. Furthermore, since it is a fund "on paper" only, the government must also raise debt against the expenses registered against the fund.

The Bank of Israel concluded, "It is of great importance that the government curbs new expenses that are of an ongoing nature as part of the looking at the medium to long term."

The survey stresses that a significant portion of the amounts included in the coalition agreements are of an ongoing nature. These are payments that, once approved, will be very difficult to cancel in the years to come. "While the size of these amounts in relation to the total war expenditures is not large, their scope in relation to the expected permanent increase in government spending is much more significant. Therefore reducing them will contribute to long-term fiscal sustainability," the report said.

This is not the first time that the Bank of Israel has spoken out against the coalition funds. In the interest rate decision last month, Governor Prof. Amir Yaron explicitly stated that the spending of the funds, especially the coalition funds, must be seriously reconsidered.

Published by Globes, Israel business news - - on November 15, 2023.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2023.

Minister of Finance Bezalel Smotrich credit: GPO
Minister of Finance Bezalel Smotrich credit: GPO
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