At 2.15%, 2015 Israel deficit is well below target

NIS 24.5 billion deficit undershoots the target by NIS 6.9 billion.

Shekel money bills (photo credit: REUTERS)
Shekel money bills
(photo credit: REUTERS)
The state’s fiscal health in 2015 was better than planned, with the annual deficit coming in at 2.15 percent of GDP, well below the 2.9% target.
The figure also fell below the 2.75% estimate published with the budget and the 2.5% of GDP recommended by the Bank of Israel.
The NIS 24.5 billion deficit undershot the target by NIS 6.9b. Of that, NIS 3.6b. came from unexpectedly high tax revenues, while NIS 3.3b. came from unexpectedly low spending.
Although lower spending is welcome news to fiscal hawks and credit ratings agencies, socially minded analysts could argue that the under-spending indicated a lack of support for the public.
The Bank of Israel has noted that Israel spends less than most OECD countries on social ministries, such as health, education and welfare. Several billion shekels, it might argue, could have gone a long way to boost such ministries, which are charged with helping to ameliorate the nation’s high poverty rate.
The budget plan for the year foresaw a 6% increase in spending for non-defense ministries from 2014’s plan, but the actual increase came to just 4.9%.
Defense spending was planned to decrease by 1.4% decrease between the two years; actually it increased 3.6%.
The fact that the deficit as a share of the economy was so low is all the more remarkable given that the economy grew less than expected in 2015. A report from the Finance Ministry’s chief economist on Sunday said the 2.3% annual GDP growth was underwhelming, and below expectations.
The unexpectedly high tax revenues allowed Finance Minister Moshe Kahlon to reverse several unpopular VAT and corporate tax increases that predecessor Yair Lapid levied to battle the unexpectedly high 3.9% deficit he inherited.
Lapid’s proposed budget for 2015 called for increasing the deficit to 3.4% of GDP.
Though Kahlon may want to take credit for the solid fiscal performance, which will help lower Israel’s debt burden and, thus, reduce the amount it spends on debt, much of 2015’s budget was beyond his control.
Because the previous government failed to pass a budget, which helped usher in March’s general election, the government ran on an automatic, month-to-month version of the 2014 budget for the first for the first 11.5 months of the year.
In December, credit ratings agency Moody’s said Israel’s political instability often led to better budget discipline.
“Although positive in that sense, it is more of an accident than emblematic of good fiscal policy management,” the report said.
According to Sunday’s Finance Ministry report, Israel’s anemic economic growth stemmed from a drop in exports and reduction in fixed capital formation and, ironically, lower public spending resulting from the failure of the previous government to pass a budget.