The GDP growth and fiscal deficit figures published by the Central Bureau of Statistics yesterday represent a huge challenge for the next government, and particularly for the next minister of finance. More than anything, they indicate that the clever trick of reducing taxes is no longer succeeding in boosting revenue - rather the opposite. The Central Bureau of Statistics can serve as a transcript of the government's marks for macro-economic policy. The two most important figures - growth and deficit - published yesterday show how far Prime Minister Benjamin Netanyahu and Minister of Finance Moshe Kahlon are from the goals they hoped to reach.
The Israeli economy grew at a lower-than-expected rate of 3.2% in 2018, and the fiscal deficit represents 3.4% of GDP, according to the initial national accounts estimates released by the Central Bureau of Statistics yesterday. The growth figure is disappointing: the most up-to-date growth projection was 3.4%. During the course of the year, the growth forecast was raised by the Bank of Israel Research Department and other entities as high as 3.7%.
The Central Bureau of Statistics' projection for the deficit is higher than that of the Ministry of Finance, which estimates that the 2018 deficit will be between 2.9% and 3.1%, but the Central Bureau of Statistics uses different definitions from those used by the Ministry of Finance for measuring the public sector deficit, and includes in it the National Insurance Institute, public hospitals, the universities, and local authorities. Last year, under the Central Bureau of Statistics definitions, the fiscal deficit was 1% of GDP, whereas the deficit as measured by the Ministry of Finance was 2% of GDP.
The government has one big achievement and one big problem. The achievement is the reduction in government debt over the past decade, despite global financial crises. Israel is one of a very few countries that have managed to do this, thanks to a responsible fiscal policy, which began when Benjamin Netanyahu was minister of finance and continued uninterruptedly until today. Israel's economy has one big problem, and that is the productivity of the Israeli worker, which is 25% below the OECD average and 40% behind the productivity of a worker in the US.
The Netanyahu-Kahlon government ends four years with worrying news on both these main issues. In 2018, for the first time in a decade, the fiscal deficit threatens to match the rate of growth in the economy. The minister of finance gives generously, the needs keep growing, and, as mentioned, the trick of cutting taxes has stopped working. This means that the trend of a falling government debt will come to a halt. This is bad news for Israel's credit rating, because declining debt was the main consideration cited by S&P when it upgraded Israel's rating last summer.
At the same time, it emerges from the Central Bureau of Statistics' figures that the productivity of Israeli workers grew in 2018 (as in 2017) at a lower rate than did the average productivity of workers in the developed countries, which means that the gap between Israel and the wealthy countries continued to widen.
The 2017 Poverty Report released by the National Insurance Institute yesterday indicates a decline in inequality, growth in the incomes of the poorer sections of the population, and a fall of 23,000 in the number of poor children in Israel. This is a huge achievement, because it was attained even though the poverty line rose and the number of children in Israel grew by 40,000. Kahlon will presumably leverage these numbers on his way to the ballot box, and fortunately for him the election is soon, because these achievements will not last. It is impossible to raise incomes and narrow gaps when productivity is stagnating. It is impossible to continue reducing Israel's Gini index of income inequality when the inequality between productivity in Israel and in the wealthy countries is rising.
The problem in 2018 is not a momentary phenomenon. It is more the opening note than the final chord. The chances are that the coming years will look more like 2018 than like the previous years. The populist atmosphere in the Knesset stokes the pressure to cut taxes and raise expenditure, and Kahlon may well turn out to be a mild version of what is to come in that respect.
It's natural that after seven good years Israel's economic skies are growing darker. Only instead of battening down the hatches and changing course, the ship's commanders seem to be navigating right into the storm.
Published by Globes, Israel business news - en.globes.co.il - on January 1, 2019
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