What is behind Israel's widening budget deficit?

The country's fiscal deficit between March 2018 and February 2019 had grown to 3.5% of gross domestic product, compared to 3.3% in the year leading up to January and 2.9% in December.

March 10, 2019 17:59
2 minute read.
An Israel Shekel note

An Israel Shekel note. (photo credit: REUTERS/THOMAS WHITE)


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Late on Thursday, after the country’s Friday morning newspapers had gone to print, the Finance Ministry published its latest fiscal deficit figures.

The country’s fiscal deficit between March 2018 and February 2019, the report revealed, had grown to 3.5% of gross domestic product, compared to 3.3% in the year leading up to January, and 2.9% in December.

The decision to publish the data late at night, preventing publication in the morning newspapers, raised eyebrows and concerns over what the Finance Ministry might be trying to hide, especially only one month before elections.

In January and February 2019, a deficit of NIS 4.9 billion ($1.35b.) was recorded, compared to NIS 2.3b. ($630m.) in the same period last year. The government’s 2019 budget targets a fiscal deficit of 2.9%, equivalent to NIS 40.2b ($11.08b.).

“February’s large fiscal deficit was mostly due to large tax rebates, both for income tax as well as VAT, which were 2.7 billion shekels higher than in February 2018,” Leader Capital Markets macroeconomist Yonatan Katz told The Jerusalem Post.

“It is not clear why this has happened, but it is most likely due to the postponement of tax return transfers from December to early 2019, in order to reduce the fiscal deficit in 2018.”

In January, Finance Minister Moshe Kahlon told ministry employees that the State of Israel achieved its 2018 government budget deficit target of 2.9% of gross domestic product, despite analyst predictions to the contrary.

Kahlon said that standing by their objectives set at the beginning of 2018 was proof they have responsibly managed the growth of the market. However, concerns have been raised regarding the level of Israel’s budget deficit, including in the OECD’s latest economic forecast summary for Israel, published in November 2018.

“The planned budget deficits are high for this stage of the cycle,” the OECD said in its report. “Steady fiscal consolidation will be needed to reduce public debt relative to GDP and ensure room for maneuver in the next downturn.”

According to Katz, “The fiscal deficit this year is likely to reach 4% of GDP without any consolidation, impacted both by slowing growth and steady growth in expenditure.”

“The next government, regardless of which party forms it, is expected to move toward consolidation of some 12 billion shekels, including both expenditure reduction and higher taxation,” he said. “Our inflation forecast of 1.4% for 2019 assumes that higher taxation contributes 0.4% to inflation in the third quarter of 2019.”

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