Tel Aviv stock exchange.
(photo credit: REUTERS)
Israel’s public debt-to-GDP ratio in 2014 dropped 0.5 percentage point to 67.1 percent, according to Finance Ministry data released Monday.
“The continued reduction in the debt-to-GDP ratio is a welcome outcome of responsible economic policy over many years, which allows Israel to deal with the global economic downturn well,” Prime Minister Benjamin Netanyahu said. He currently holds the Finance Ministry portfolio.
The country’s debt levels, which help determine its credit ratings and the interest levels that it pays, have been steadily falling for years. In 2008, public debt stood at 81.9% of GDP.
The 2014 debt amounted to NIS 715.8 billion, up from NIS 696.3b. the previous year. The economy, however, grew at a faster rate.
The Bank of Israel wants the country to lower its debt to roughly 60% of GDP by the end of the decade, a level that it says is sustainable.
Even at its current levels, Israel’s debt is lower than many other developed countries. In the US, public debt stands at 105.6% of GDP. In the euro zone, the average is 107.7%. The average of all OECD countries in 2014 was 94% of GDP.
Still, Israel pays a higher premium on its debt than similar countries. Former Bank of Israel governor Stanley Fischer noted that political and security risk led Israel to pay roughly double the expected amount. In 2015, Israel was scheduled to pay NIS 40b. in interest payments alone, more than twothirds of what it spends on defense.
Part of the credit goes to the last two finance ministers, as does some blame for deviations. When deficits are higher than economic growth, the debt goes up. When they country overspends less than it grows, the debt burden goes down.
Likud’s Yuval Steinitz aggressively raised taxes to increase revenue after the 2012 deficit came out at roughly double the target. His successor, Yair Lapid, broke recommended deficit targets as well, but he took tough measures to further raise revenues and cut spending and did damage control following Operation Protective Edge in 2014. Yet he also planned to blow up the deficit framework in 2015, a move that was only scuttled by early elections.
Tough decisions with negative repercussions for Israel’s poor and its wealth gaps belie its laudable fiscal performance. The spending rule limits how much the government can grow relative to the economy, which has shrunk Israel’s government spending to the point that it is lower than the OECD average. Given its high interest payments and defense spending, that leaves significant gaps on social spending.
“Given that Israel has one of the lowest rates of civilian expenditure among OECD countries, as well as especially severe inequality, the continued contraction of expenditure will widen the gap between Israel and the OECD countries in delivering civilian services and redistributing income for the purpose of reducing inequality,” the Bank of Israel said its annual report in 2014.
“It is proposed that the new government adopt a fiscal rule that will combine a clause about the permissible increase in spending at given tax rates and will allow a deviation from this rate of increase in the event of changes in statutory tax rates,” the report said.
Outgoing Finance Ministry director- general Yael Endorn praised the falling debt but urged structural economic reforms.