Finance Minister Moshe Kahlon.
(photo credit: MARC ISRAEL SELLEM)
In news that will be welcome to taxpayers, government checkbook balancers and credit ratings agencies alike, the Finance Ministry estimated Tuesday that Israel’s debt burden fell to 64.9% in 2015 from 66.7% in 2014.
“This is an achievement for the Israeli economy,” said Finance Minister Moshe Kahlon. “Decreasing tax burdens and interest payments will allow us to increase budgets for education, health, welfare and security.”
The debt burden, which compares how much Israel owes its creditors to the size of its economy, has important implications for the premiums the country must pay on new debt.
A lower burden is a signal to lenders that Israeli bonds are less risky, which means they can be sold with lower interest rates. The combination of lower overall debt and lower interest payments can free up vast amounts of cash in the government budget, meaning more resources for government services without increasing taxes.
For example, the 2016 budget has allocated NIS 128 billion shekels for repaying debts, of which NIS 39.4b. are interest payments alone. Compare that with the NIS 56b. defense budget, the NIS 52b. education budget or the NIS 10b. welfare budget, and the significance of reducing debt payments becomes clear.
The debt burden drops when Israel’s economic growth is larger than its budget deficit (though the particulars of its debt payment schedule can complicate that rule of thumb). In 2015, Israel’s deficit came out to just 2.15% of GDP, well below the 2.5% the Bank of Israel had hoped for and the 2.9% target set into law.
“Israel’s fiscal discipline has been impressive,” a UBS review from last week cooed. The bank attributed the strong fiscal performance to unexpectedly high tax revenues, which a strong labor market helped buoy The fact that government spending was largely confined to the previous year’s budget outlines also helped. The flush of cash gave Kahlon room to reduce corporate tax 1.5 percentage points and VAT by 1 percentage point.
Though Israel’s economic growth has been moderate at just 2.3%, that rate remained larger than the new debt Israel took on during the year.
Ofer Klein, the head of Harel Insurance Investment and Financial Services’ economic research division, pointed out, however, that many of the factors that kept the deficit down in 2015 were one-time events.
“We do not believe that we will see significant surpluses this year, as well. Therefore, without a cut in spending, the chance that the government will further reduce taxes this year is low,” he said.
Israel has steadily reduced its debt, which was as high as 98.3% in 1995, the earliest year for which the Bank of Israel made data available, though it spoked during the second Intifada in the early 2000s.
The country’s debt level is far below that of most advanced economies, which average 105.2% debt-to-GDP levels, and while Israel’s debt dropped in the past year, the Finance Ministry noted that other countries in its peer group added an average of 0.9 percentage points to their debt.
“The decrease of the debt-to- GDP ratio to under 65%, indicates the strength of the Israeli Economy,” said accountant general, Michal Abadi-Boiangiu.
Tuesday’s estimate, she said, represented the first time the office offered its initial forecast around the new year.