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Netanyahu sides with Treasury on curbing budget growth
By GLOBES
25/12/2013
Prime minister adopts Finance Ministry's changes, against the Bank of Israel's advice.
 
Prime Minister Binyamin Netanyahu has sided with the Finance Ministry on growth in the state budget, Globes has learned.

On Wednesday, Netanyahu decided to adopt the changes that the ministry proposed in the formula governing public spending growth with the aim of sharply curbing that growth. As a result, the state budget in the coming years will grow at a rate of 2.5-2.6% only. The growth rate would have been 4% under the existing formula.

Until 2010, public spending grew in line with the rate of growth of the population. That year, however, the Finance Ministry, the Bank of Israel and the National Economic Council decided that the rate of growth of government services had to be in line with economic growth, but that it also needed to accord with a falling ratio of public debt to GDP. It was therefore decided to introduce a formula governing total public spending consisting of the desired level of debt (60% of GDP) divided by the current level (68%), multiplied by the average rate of growth in the previous ten years. This formula means growth in the state budget of 4% in 2013 and 2014, which is a higher rate than the current rate of growth of GDP.

This expansive formula rule is not to the liking of either the prime minister or Finance Ministry officials, and so has been reviewed.

The rate of spending growth in the past year was affected substantially by the technical change in the Central Bureau of Statistics' method of measuring GDP, which had marked effects on the main fiscal yardsticks. It significantly raised Israel's GDP figure and reduced the debt:GDP ratio, leading to a substantial rise in the level of spending under the existing spending rule (by more than 0.6%).

Netanyahu has now adopted the changes to the formula proposed by Finance Ministry: lowering the debt target from 60% of GDP to 50%, and substituting for the average GDP growth rate over the previous decade (which stands at 4%) another variable, the natural growth rate of the population, which has been just 1.8% a year over the past twenty years. The practical effect of adopting this contractionary formula will be a drastic cut of NIS 5-10 billion in the 2015 budget, which does not look easy to do given current political alignments.

A final discussion on the spending formula was held today between the Finance Ministry, the Bank of Israel, and the Prime Minister's Office. The Finance Ministry and the Bank of Israel agree that the level of debt must continue to fall, and that the fiscal deficit must be no more than 3% of GDP. They disagree over how these fiscal goals should be reached. The Bank of Israel believes that Israel's civilian spending, which is among the lowest in the OECD, cannot be reduced without affecting the level of state services. The central bank therefore recommended that taxes should be increased, and that any change in the formula should be designed to produce a minimal impact on the rate of spending growth. The Finance Ministry on the other hand believes that taxes should not be raised, especially direct taxes (income tax), and recommended that the formula should be changed in such a way as to reduce spending growth sharply, to around 2.5%, which is what has happened.

Since the rate of natural population growth has been steady for 25 years, and the debt target can also be expected to remain consistent, and not to fluctuate as it has in the past four years.
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