In its latest projections, the Bank of Israel Research Department foresees a jump in the budget deficit and the national debt if changes are not made, Governor of the Bank of Israel Prof. Amir Yaron said today in his lecture at the Israel Democracy Institute's Eli Hurvitz Conference on Economy and Society 2019. "If the government continues implementing all of the programs and undertakings that it has taken upon itself, and does not raise taxes, the budget deficit is likely to stabilize at the dangerous level of over 4.5% of GDP, and the ratio of debt to GDP will reach 75% by 2025," Yaron stated.
"This is a significant scale, and it does not include the defense budget supplement that the government may implement," he said. "In a downturn scenario, which is unfortunately not unlikely, the increase in the deficit and debt will be even more substantial." Yaron said that even meeting a deficit target of 3% of GDP "would not prevent a continued increase in the ratio of debt to GDP. The government will therefore have to make a greater effort to stabilize the ratio of debt to GDP."
How should the deficit be handled? Yaron emphasized that there was room for cost cutting in government ministries, but made it clear that civilian spending in Israel (excluding interest) is already very low by international standards. "The increase that we saw in civilian spending in recent years is a result of the fact that the government had to respond to the public's budget demands. There is therefore little likelihood that spending can be significantly cut without painful damage to the services supplied by the government," he said.
Yaron remarked that in order to meet the budgetary challenge, the government would eventually have to take action to increase its revenue. He mentioned that the tax burden had fallen substantially in recent years, and was lower than the average in OECD countries. How should revenue be increased, and what taxes should be raised? Yaron did not address this point in detail, but emphasized, "In selecting the desirable composition of revenue, it will right first of all to eliminate exemptions for which there is no economic justification, and to avoid as much as possible taxes that will distort and detract from incentives and productivity."
Published by Globes, Israel business news - en.globes.co.il - on December 17, 2019
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