As the IDF makes its preparations at the Gaza border, there is also high tension on the economic front. A prolonged war will affect the fiscal deficit from two directions: state expenditure will rise to meet military needs, and to rehabilitate the Gaza border area and its residents, while as downturn in economic activity will reduce tax revenues. Former director general of the Ministry of Finance Yarom Ariav believes, however, that the damage can be mitigated.
Talking to "Globes", Ariav outlines how the extra expenditure caused by the war can be financed without expanding total government spending. That, of course, will require fundamental changes in budget priorities.
"It is extraordinarily important that a substantial portion of the resources should come from diverting existing funds, chiefly from the coalition money," Ariav says, referring to budgets allocated to coalition parties and used by them to promote sectoral interests. "Besides the direct economic aspect, this is critical for restoring public confidence in the economic leadership," he stresses.
Ariav, who, among things, chairs the investment committee of the Israeli Citizens’ Fund, the sovereign wealth fund that manages state revenues from natural gas production and other natural resources, says, "On the expense side, there is no reason at the moment for the budget to be increased. There need to be changes in spending, because anything unconnected to the fighting can wait."
But even if the money is redirected to the right places, there is no dispute that the deficit will swell. "On the revenue side, we’ll see a sharp decline," says Ariav. "Investment will be drastically cut. The government must take care that private consumption is not hit too badly, but people will clearly cut back on spending."
The 2024 budget approved by the government last May is built on the basis of a deficit target of 1.3% of GDP. Even before the Hamas massacre in the southern settlements, the Ministry of Finance had begun to prepare for a deficit of double that or more, among other things because of the impact of the government’s judicial overhaul program. It is now clear that the deficit will be much higher, with economic experts differing on how high it can be allowed to go.
"It is now necessary to switch to more expansionary government policy, but it’s important to ensure that the deficit next year does not exceed 7-8%," says Ariav. "The Ministry of Finance has announced plans to give businesses grants similar to those made available during the Covid pandemic. That will provide breathing space for private consumption, but we must make sure that the deficit does not get out of control, from the point of view of confidence on international markets in our management of the economy."
The coalition funds allocated by the current government amount to more than NIS 13 billion, mostly for sectoral needs, in accordance with the demands of the haredi (ultra-Orthodox) and religious parties. Most of the money has not yet been used. The government has the power to halt these transfers and to use the money for security, health, welfare, and other pressing needs.
Besides that, the compensation fund under the Property Tax and Compensation Fund Law has accumulated NIS 18 billion. The fund is designated for compensation payments for direct damage to property from war and other causes, but the Ministry of Finance has already announced its intention of drawing money from the fund to pay compensation for indirect damage to businesses, i.e., the grant that is meant to be finalized in the coming days.
What if the budgetary sources are not enough despite reallocation of spending?
"If it turns out that more money is needed, and that that is justified, then the spending framework can be expanded by legislation. The overriding goal is that the economy should not sink into a deep recession, because then it will be very difficult to support the security burden, and that will lead to a spiral of rising deficits."
Published by Globes, Israel business news - en.globes.co.il - on October 18, 2023.
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