Treasury sees hit to social services without new budget

unemployment  photo: Ariel Yarozlimksy

The Ministry of Finance is unable to adjust spending priorities under transitional budget rules. It is also concerned that jobs growth is mainly in the public sector.

The Ministry of Finance has warned of unprecedented damage to social services if no new government is formed after the election on March 2 and the state continues to operate under transitional budget arrangements until the end of 2020. "The need to abide by the law on the state budget obliges us to make cuts in services that no-one thought would ever be hit. A NIS 20 billion spending cut without the ability to change priorities will cause severe harm to services to citizens. The situation will be very difficult."

The fiscal deficit for 2020 is projected to be 3.9% of GDP, but in 2021 the government will have to close a NIS 30 billion gap in order to deal with a deficit projected at 4.2% of GDP in the Ministry of Finance's forecasts for 2021-2023, due to be presented to the government today. Ministry sources stress that the numbers do not take into account additional budget provisions for the disabled, for defense, and for coalition agreements that will be signed in the process of forming the next government, and a list of projects with an aggregate estimated cost of some NIS 10 billion. In addition, the Ministry of Finance warns that in the event that the state budget is not approved in 2020 and the economy slows as a consequence, state revenues will be hit to the tune of some NIS 5 billion. At the same time, the Ministry of Finance says that this is "an extreme and unlikely scenario."

The Ministry of Finance forecasts being presented to the government are based on a more optimistic scenario, in which a new state budget is approved no later than November. The ministry's economic growth forecast for this year is 3%. The forecast for the unemployment rate is 3.7%. According to the forecasts, the annual growth rate for the period 2020-2023 will stay at 3%, led by exports of technology services and private consumption.

The Ministry of Finance estimates that the start of gas exports from the Leviathan reservoir to Jordan and Egypt will support growth in the next few years. The ministry estimates that gas exports will amount to 6.5 billion cubic meters in the coming year, adding 0.3% growth to the Israeli economy for 2020. On the employment front, however, a worrying phenomenon has arisen whereby most jobs growth is in the public sector rather than in the private sector, and the rise in pay too is mostly concentrated in the public sector. State tax revenues have undergone a recovery recently.

The Ministry of Finance says that although growth has moderated it remains good, and that 2019 saw 3.3% growth, which is higher than the economy's long-term annual growth potential of 3%. The slowdown in growth is mainly a result of moderation in private consumption and in investment, while on the other hand technology exports continue to drive the economy forward, with annual growth of 9%. The worrying decline in investment in plant and machinery recorded at the end of 2019 is explained by the activity of a large company with strategic importance for the economy.

State revenues for 2019 totaled NIS 347.6 billion, of which NIS 317.4 billion came from tax collection. State revenues in 2020 will total NIS 361.3 billion, assuming that the state budget is approved in the Knesset by the end of October. The forecast has been lowered by NIS 1 billion, mainly because of lower than expected inflation.

As for the problem of the oversize budget deficit, the Ministry of Finance says the deficit in 2019 of 3.7% of GDP was 0.8% over the budgeted framework. Nevertheless, the debt:GDP ratio is expected to show a decline for 2019. Ministry sources said, "It's true that we had a great deal of luck, because prices in GDP were high (because of the rise in pay, A.B.), and there was appreciation of the shekel, but still, it's preferable to have an economy is which the debt:GDP ratio is falling rather than rising."

By law, the Ministry of Finance is obliged to provide updates to the government in January.

The 2020 provisional budget will total NIS 400 billion, some NIS 17 billion less than the Ministry of Finance requires in order to meet all the state's commitments. "The only good consequence of this is a reduction in the deficit, but on the other hand it will have critical implications for the services we provide in health, education and security, and we are already seeing this in requests reaching the ministry. At the same time it must be understood that there can't be expenditure of NIS 420 billion because that would mean a deficit of 4% of GDP."

The Ministry of Finance believes that in the end a government will be formed after the upcoming election and that a state budget amounting to NIS 410-412 billion will be approved in the government in July or thereabouts. "It's reasonable to assume that there will be things than can be fixed retroactively," ministry sources said.

Published by Globes, Israel business news - en.globes.co.il - on January 12, 2020

© Copyright of Globes Publisher Itonut (1983) Ltd. 2020

unemployment  photo: Ariel Yarozlimksy
unemployment photo: Ariel Yarozlimksy
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