Credit ratings agency Standard & Poor’s on Thursday downgraded Israel’s
local currency credit rating to A+ with a stable outlook, from AA-, after
Finance Minister Yair Lapid announced his plan to raise the 2013 deficit target
to 4.9 percent from 3% of GDP, adding NIS 19 billion to the annual
Lapid brushed aside the downgrade, saying it “is not surprising.
It came in response to a situation we are fixing now.”
the price on Israel’s 10-year government bonds fell for the first time in eight
days with the news of Lapid’s plan to raise the deficit.
Lapid hopes to
pass his proposal, which leaked late on Wednesday night, at Sunday’s cabinet
In addition to increasing deficit targets, Lapid’s plan also ups
the limit on how much the government can increase spending from one year to the
next, allowing him to spend 2.2% more in 2013 than the previous year. That would
give him room to spend NIS 6.5b.
more than in 2012, according to figures
cited in the proposal.
(Calculations using Treasury figures put the spending increase closer to NIS 6.3b.) If the plan were
approved, the 2013 state budget would hover at around NIS 293b.
Lapid would return the deficit limit to 3%, which is also higher than the
current 2.75% target for that year.
That change would swell the 2014
deficit an additional NIS 2.6b.
Prime Minister Binyamin Netanyahu and
Bank of Israel Gov. Stanley Fischer were surprised at Lapid’s decision and will
meet over the weekend to discuss it.
The move is likely to meet with
disapproval from Fischer, who has argued that raising the deficit beyond its set
levels harms the economy’s longterm stability. Specifically, Fischer has said
that higher deficits reduce faith in the government’s ability to keep its
finances in order, raise future debt payments, which are higher for Israel than
in similar countries, and rob the nation of tools for stimulating the economy
should it come upon hard times in the future.
Fischer has conceded,
however, that the deficit was likely to overshoot its target this
MK Reuven Rivlin requested that the Knesset Finance Committee hold
a hearing on the proposal, while former Bank of Israel governor David Klein
called Lapid’s plan dangerous.
“It looks like the finance minister has
given up,” Klein said in an Army Radio interview.
Shelly Yacimovich praised Lapid for taking action to limit spending
“For the first time since taking office, the finance minister has
made the right move,” Yacimovich said, adding that “even the European Union has
become skeptical about the effectiveness of austerity policy.”
such as increasing VAT, imposing new taxes, decreasing public sector wages and
cutting health and education benefits harmed the middle class and the economy as
a whole, she said.
Fellow Labor MK Avishay Braverman, who chairs the
Knesset Economics Committee, seemed to disagree.
“He’s saying okay,
listen: We’re not going to deal with the deficit this year; it will be 5%. But I
promise Stanley Fischer, I promise all of you, that I will return to 3% in the
short term. I’m very nice,” Braverman said in an interview with Army
“I always said that the deficit, when Israel isn’t in a heavy
recession, should go according to the European levels, the Maastricht levels, of
3%,” he said.
Shas leader Eli Yishai, on the other hand, called for
support of the deficit increase, which he said would “minimize harm to the weak
classes and somewhat remove the sword on the necks of the middle
According to Shmuel Ben- Arieh, market research manager at
Pioneer Financial Planning, the plan was based on political considerations, not
“Expanding the deficit target is dangerous to the Israeli
economy’s image as stable and responsible,” he said.
“It’s puzzling that
Netanyahu, who contributed to building this image, wouldn’t oppose the proposed
move,” which he noted would further raise Israel’s borrowing costs.
deterioration in Israel’s security situation, Ben-Arieh added, would further
swell the deficit.
In his proposal, Lapid wrote that passing the budget
so late in the year limited his ability to meet the current legal
“Approving the 2013 budget at a late time seriously reduces the
ability of the government to carry out changes in the budgetary agenda in a way
that fits its budgetary obligations,” the proposal said. Spending obligations
made by the previous government “create a concern that, in the absence of
adapting actions by the government, the government deficit for 2013 will rise to
5.5% of output.”
Because the government hasn’t passed a budget, it is
working on a month-bymonth automatic extension of the 2012 budget. According to
Treasury figures, the cumulative deficit for the past year has already risen to
4.5% of GDP.
“In truth, it’s not surprising,” said Harel Finance’s Ofer
Klein. “What is surprising, and actually for the better, is that unlike the
past, this time the Finance Ministry is already putting the numbers on the table
in May and admits that there is no chance to meet the deficit target, and not
waiting to tell us that in December.”