Two of the private investment houses' prominent chief economics are warning that the Israeli budget, approved on Friday, exposes the market to a potential severe crisis, which could develop following even a relatively minor deterioration in fiscal conditions.
The criticism focuses on the decision to increase government expenditure by more than 5% in 2017, increasing the target budget deficit to 2.9% of the GDP, and basing the planned increase in revenues on one-time income from entities such as Mifal Hapayis, Israel Airports Authority and the Jewish National Fund (JNF) - which are unlikely to pay the entire sums.
"In order to bring the deficit to the new target, the Ministry of Finance mainly uses the transfer of funds from the JNF, Israel Airports Authority and Mifal Hapayis to the Ministry of Finance," writes Jonathan Katz from Leader Holdings and Investments Ltd. (TASE: LDER) chief economist. "This is a highly questionable phenomenon, because these sources are temporary, unlike an increase in expenses or tax reduction, which are difficult to go back on afterwards."
Katz also says that the increase in expenditure is problematic, "Despite the boost in budget expenditure, there is almost no increase in education and infrastructure expenditure - two fields which are expected to contribute to a growth in productivity in the future. A market with full employment, which is at the accelerated stage of the business cycle, is not supposed to employ a fiscal policy of expansion, on the contrary. If the market enters a more moderated economic environment, there will be no fiscal tools to support activity. In addition, a more moderated environment will lead to a sharp rise in budget deficit and damage credibility."
"The steps planned by the government in the next budget increase the fiscal risk," says Meitav Dash Investment House Ltd. Chief Economist Alex Zabezhinsky. "Past experience shows that the risk is not expressed in the field of government bonds gradually. Until a certain stage, deterioration in the fiscal conditions is barely felt. But if a crisis breaks out, it escalates quickly. The deficit could rapidly jump to a much higher level, due to rising unemployment and decrease in revenue from cyclical sources.
"In this case, the ratio of debt to produce will rise much more rapidly. If fiscal conditions in Israel deteriorate, the attitude of investors, mostly foreign, would not be the same as the attitude towards developed states, but much more similar to developing states that got into trouble."
Zabezhinsky says, "While pushing the limits regarding revenues and expenses and creativity in budget management usually characterize crisis periods, they are implemented now, when the market is at the peak of its economic cycle. Increasing the deficit is not expected to boost growth in a market that is already characterized by full employment."
Published by Globes [online], Israel business news - www.globes-online.com - on August 15, 2016
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