The Israeli government is preparing to widen the fiscal deficit by hu7ndreds of millions of shekels to prevent a jump in fuel prices, sources close to the matter have told "Globes." In the 2023 state budget, approved in May, NIS 1.1 billion was allocated for keeping gasoline prices cheaper until the end of the year. However, since then the price of oil on world markets has risen, while the shekel has depreciated against the dollar, and the budget allocated to keep just three months ago to keep fuel prices lower is already starting to run out. At the current rate, the money allocated will not last until the end of 2023.
Of the NIS 1.1 billion allocated to reduce the excise tax on fuel, about NIS 600 million shekels has been used so far. In August alone, the Ministry of Finance lost NIS 250 million revenue in lower excise tax collection to keep fuel prices unchanged. In other words, 25% of the allocated budget has been used in August, and the amount needed in September to keep gasoline prices unchanged is likely to be more.
Sources familiar with the matter estimate that by the end of September, about NIS 200 million will be left in the amount allocated for excise duty reductions. If there is no significant strengthening of the shekel or a drop in oil prices, this money will not be enough to cover October-December. When the money runs out, it is believed that the government will prefer the "easier" way of deepening the fiscal deficit to keep gasoline prices from rising.
Since the new government was formed in December 2022, the maximum retail price of a liter of government price-controlled unleaded 95 octane gasoline at self-service pumps has remained virtually unchanged, rising by NIS 0.01 to NIS 6.86. The government plans keeping the price unchanged in September, even though oil prices on world markets remain high at $85 per barrel of Brent crude and the shekel weakened by 3.5% in August. According to Bank Leumi chief economist Dr. Gil Buffman prices per barrel will range between $78-88 per barrel in the remainder of 2023.
Meanwhile there are no alternatives on the agenda
The government, it seems, plans to exceed the budget framework allocated for fuel price reduction. Options such as halting the tax cut, or reducing by spreading the remaining money until the end of the year, are not currently being seriously considered by the decision makers. Nor is there any alternative of continuing full price control, through cuts in other ministries.
Prime Minister Binyamin Netanyahu and Minister of Finance Bezalel Smotrich, who promised to cut fuel prices when the government was formed, will probably prefer, according to sources familiar with the details, to widen the fiscal deficit to prevent fuel price increases. In their view, the deficit is already low, so there is no fear of increasing it.
Although the deficit target set by the Ministry of Finance in the budget for 2023 is low, at 1.1%, by the end of July the deficit has already reached the threshold of the target and now stands at 1%, due to lower state revenues. According to market forecasts, the actual deficit at the end of the year will be much higher than the target, and will range between 2.25%-3%. In this situation, while the Ministry of Finance coffers are already emptying due to the weakening of the high-tech, real estate and other industries, increasing the deficit by hundreds of millions of shekels will certainly not please the credit rating agencies and encourage foreign investors.
Although in GDP terms, this policy increases the fiscal deficit by less than 0.1%, Israel's fiscal restraint has so far been the government's strong card in the eyes of the rating agencies, and may have even prevented some from cutting Israel's rating outlook in the previous reports. In the coming months, Moody's and S&P will publish Israel's latest rating, against the background of their warnings about the consequences of the changes in the judicial system.
One way or another, the government intends to continue the policy of "temporary" tax reductions next year as well. In the two-year state budget approved by the Knesset, NIS 1.8 billion was allocated for this aim in 2024.
"A short term measure without effect"
BDO chief economist Chen Herzog told "Globes," "Subsidizing gasoline is a short-term populist measure with a high budgetary cost with no real effect on the cost of living."
He adds, "This subsidy comes out of citizens' pockets, and in fact those who travel on buses and don't have a car, will subsidize those who have a large and polluting vehicle. If the state really wants to deal with the cost of living, it should take these budgets and use them to encourage public transport, electric vehicles, and promote mass transit programs, which really make structural efficiencies that lower the cost of living. Subsidizing gasoline prices is not an economically correct measure and it is also socially and environmentally incorrect, because you are investing billions of shekels that do not result in real efficiency or cost reduction."
Losses of about NIS 3 billion
Smotrich did not initiate the policy of 'temporary' cuts in excise on fuel. In April 2022, following Russia's invasion of Ukraine, which boosted oil prices worldwide, the then Minister of Finance, Avigdor Liberman, introduced the policy. Since the start of the cuts, 18 months ago, the state's coffers have suffered a NIS 2.9 billion loss in revenue.
The difference is that the original plan was more clearly defined, with cuts for a few months ahead, and a mechanism that determined that the tax benefits would be reduced when oil became cheaper. The fuel price was updated every month according to various imports, and did not remain artificially stable. Another notable difference was that at that time the state enjoyed budget surpluses of tens of billions of shekels, and could afford to give up a small part of the revenues in favor of lowering fuel prices. Today, in contrast, the deficit stands around NIS 18 billion - even before it is breached in favor of continuing to finance the fuel price cuts.
The Minister of Finance declined to comment on this report.
Published by Globes, Israel business news - en.globes.co.il - on August 29, 2023.
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