BOI: Change of fiscal targets needed

Over the past decade Israel has taken important steps to strengthen fiscal discipline.

bank of israel 88 224 (photo credit: Ariel Jerozolimski)
bank of israel 88 224
(photo credit: Ariel Jerozolimski)
The Bank of Israel warned on Tuesday that recent government decisions to increase education and welfare spending demand that a change in fiscal policy targets is in order if the country wants to meet international standards. "The recent decisions by the government in the areas of education and welfare have budgetary implications increasing the growth of public expenditure at a rate of between 2.5 percent and 3% a year until 2010," said Dr. Michel Strawczynski, deputy head of research at the Bank of Israel at a conference at the Maurice Falk Institute for Economic Research in Jerusalem. "If the government will not cut expenditure in other areas, the government will need to take a decision in making adjustments to its fiscal targets, to allow convergence of the public debt-to-GDP ratio to international standards." To maintain a sound fiscal policy stance, the government has set itself a target to comply with a 1.7% real expenditure growth ceiling and the allocation of any revenue overperformance to debt reduction. Public expenditure has declined from 65-70% of GDP after the 1973 war to 47% - below the EU average and similar to the level in the Netherlands and the UK, but higher than the US. The government's fiscal policy seeks to decrease the budgetary deficit to 1% so that public debt as a percentage of GDP will narrow to 60% which is the average percentage in OECD countries. Over the past decade Israel has taken important steps to strengthen fiscal discipline. As a result of a gradual decline of the size of the public sector since the mid-1980s and adherence to government expenditure targets, public debt as a percentage of GDP has been reduced to around 80% in 2007 from 100% a couple of years ago. "Assuming a completion of the government's multi-year tax reduction plan, the public debt-to-GDP ratio could be reduced to the desired 60% by 2010," said Strawczynski. "However, a slowdown in the US economy affecting local growth rate of the economy could delay the reduction of the ratio." The remarks were made ahead of next week's visit of a high ranking OECD delegation led by Thelma Askey, deputy secretary-general of the OECD, to Israel, which will conduct negotiations relating to the country's readiness for gaining admittance to the organization.