By Nick Mann | 14 February 2013
Israel posted a government deficit equivalent to 4.2% of its gross domestic product last year, as lower-than-anticipated tax revenues meant it missed its budget goal.
Figures published by the Bank of Israel yesterday reveal the deficit-to-GDP ratio was more than double the 2% signed off when the budget was approved at the end of 2010. It was also around 1% of GDP higher than the deficit recorded in 2011.
‘Most of the deviation from the deficit ceiling reflects tax receipts which were about NIS 14bn below projections when the budget was approved,’ the Bank explained in a statement.
The remainder was made up of the second consecutive year of lower-than-expected ‘non-tax’ revenues and above-budget spending, which was made possible by bringing forward unused spending from the previous year’s budget.
In particular, the Bank highlighted the impact of below-forecast growth in wages and new home sales on tax revenues. It attributed about a quarter of this to ‘overly optimistic’ forecasts when the budget was originally approved in 2010. While the government updated its 2012 deficit forecast during 2011 in light of this – to 3.4% – it did not make any adjustments to reduce the deficit.
‘It was only in the second half of 2012, as the deficit continued to grow, that the government decided to increase tax rates in order to reduce the deficit, primarily heading into 2013,’ the Bank said.
The Bank noted that an overspend was also estimated for 2013, despite the legally binding expenditure ceiling put in place in 2010. This year, spending was NIS 13bn above the ceiling and this gap is expected to grow ‘markedly’ in 2014 and 2015.
‘If the government does not make adjustments to reduce the increase in expenditure, so that it is aligned with the expenditure ceiling set by law, a consistently increasing gap between government expenditure and the ceiling is expected over the coming years, as several of the government's programs are multiyear initiatives,’ it explained.
It added: ‘Aligning the increase in government expenditure with the ceiling set in law will thus pose a significant challenge to the government when constructing the budgets for 2013 and future years.’
Even if the Israeli government does reduce spending in line with the ceiling, the Bank forecasts the deficit will be 3.6% of GDP this year, based on an economic growth rate of 3.8%. This will also require it to either increase taxes or remove tax breaks, it noted.
If it doesn’t adjust its spending plans, the deficit would reach 4.9% of GDP, it warned. This ‘will continue to increase in upcoming years as well,’ it added. ’As a result, the debt-to-GDP ratio will approach 100% toward the end of the decade, even using lenient assumptions regarding the impact of the deficit and debt on interest rates and growth.’
Israel has yet to pass a formal budget for 2013 after it was postponed to make way for last month’s general election. Last week, it was reported that a budget was now not expected to be passed by the Israeli Parliament, the Knesset, until May or June.
