Israel's fiscal deficit is not waiting for elections and is galloping towards the threatening level of 4% of GDP. Sources inform "Globes" that that is the main headline of the forecast that the Ministry of Finance will present to the government this Sunday in its semi-annual update. The worrying figures will be released against the background of a transitional government that will not wish to make painful spending cuts because of the upcoming election, and a minister of finance about whom there is considerable doubt whether he will continue in his post in the next government. Government sources said today: "We still don't know who will be the next minister of finance, but we already know who won't."
Changes are expected at the top level in the Ministry of Finance as well, in the light of ministry director-general Shai Babad's desire to step down. "Globes" has learned that the accountant general, Rony Hizkiyahu, will probably be appointed acting director-general of the ministry in the next few days. Babad said recently that he would make a final decision on his future only after talking to Minister of Finance Moshe Kahlon, which he is due to do shortly. The assessment in the ministry is that Babad will want to leave now in order to start his cooling-off period as soon as possible, as he looks towards a job in the private sector.
Meanwhile, under the "numerator law" which requires the Ministry of Finance to provide a multi-year fiscal forecast to the government in June and November each year, the ministry will present its updated forecast to the government on Sunday. This update will show further worsening of the expected fiscal deficit for 2019, after, against the minister's objections, the ministry projected a 3.5% deficit in January , which compares with a target of 2.9%. Since that update, the weakness in state tax revenues has continued, while spending by government ministries continues its dizzying rise, well beyond the budget plan - a phenomenon that began a year ago.
According to the latest official figures published by the Ministry of Finance at the start of this month, the current fiscal deficit (for the preceding 12 months) has already reached 3.8% of GDP. For the first four months of the year, the deficit was NIS 14.1 billion, which compares with a deficit of NIS 1.5 billion in the corresponding quarter of 2018 (which ended with an annual deficit of 2.9% of GDP according to the Ministry of Finance, and 3.1% according to the Central Bureau of Statistics; each of them calculates the deficit differently).
Economists are increasingly of the view that the next government will have to introduce unprecedented measures in order to rein in expenditure and increase revenues, by far more than the NIS 20 billion we reported only two months ago. Without such measures, the country runs the risk of a downgrade of its credit rating (after S&P raised it only a year ago to an all-time high) and the loss of the confidence in the Israeli economy on the part of the financial markets that has been built up in a process going back almost 20 years to the fiscal crisis of 2002.
In itself, the decision to go for new elections is not expected to lead to a rating downgrade, even though it is a problematic and worrying development for the economy. For the time being, the market continues to stick to positive sentiment towards Israel and to believe that the repeat elections will delay by three or four months the government's preparations for the tough belt-tightening measures that will be required next year. So far, the markets are not pricing in the likelihood of a different scenario, in which the political system in Israel goes into a prolonged paralysis that is liable to send the economy into a severe crisis of uncertainty and to endanger the achievements of all the past few governments in building market confidence.
Under the optimistic scenario, in which a new, fully-functioning government is formed swiftly, before November, the 2020 budget will be approved only in March next year. The law stipulates that the Knesset is dissolved if it does not pass a budget in three readings by the end of March, and so the 2020 budget will be passed under time pressure, obliging the Ministry of Finance to go for simple, aggressive measures that may not necessarily be desirable from an economic point of view, such as raising the rate of VAT by one or two percent. In addition, the Ministry of Finance will have to make deep, across-the-board cuts in ministerial budgets, after their expenditures have run out of control.
A worse case is that uncertainty prevails in the economy for a long period, and in the worst case, the future government will abandon the fiscal responsibility that has characterized past Israeli governments and precipitate a collapse of faith in it and an economic crash.
The decision to call a repeat election will paralyze other important measures that the government had planned to advance in the course of 2019. Among other things, it planned to attempt to reach agreement on raising the retirement age for women to 64. Leaving the retirement age where it is will oblige the old pension funds to cut 1.26% from the retirement pensions they pay out from August.
Another important measure going into deep freeze is the decision to construct a metro in Tel Aviv, which required special legislation. The discussions on a new multi-year defense budget that were supposed to start this month will also be frozen. The crisis in relations between the National Insurance Institute and the Ministry of Finance, which is threatening to deprive the Ministry of Finance of revenue in the tens of billions of shekels annually, will not be resolved. Work disputes can be expected to break out because of the freezing of talks on new pay agreements for doctors and the public sector. Moves in government companies, among the flotation of Israel Aerospace Industries, privatization of Haifa Port, and achieving agreement on reform at Ashdod Port, will not be advanced by the current government. Another important area that will suffer because of the repeat election is stimulation of productivity growth: the recommendations presented by a committee headed by Prof. Zvi Eckstein for strengthening and upgrading professional training will not be implemented.
Published by Globes, Israel business news - en.globes.co.il - on May 30, 2019
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