Next government will need to spend less, says new budget plan

A recently-filed budget plan from the Finance Ministry projects a significant increase in the deficit in the coming years, which should be mitigated by cutting funds where possible.

 FINANCE MINISTER Avigdor Liberman: Four catalysts behind the chaos. (photo credit: YONATAN SINDEL/FLASH90)
FINANCE MINISTER Avigdor Liberman: Four catalysts behind the chaos.
(photo credit: YONATAN SINDEL/FLASH90)

A new multi-year budget plan filed on Wednesday with the government secretariat offers insight from the Finance Ministry on inflation and rising costs in Israel over the last few years. It also presents data on projected government spending.

According to the document, those expenditures are expected to be several billion shekels higher than the budget allowed by government frameworks set in place, resulting in an expanding deficit over the next three years.

In order to cope with that deficit, the submitted plan suggests that the next government make some serious budget cuts, or risk exacerbating the issue.

The projected deficit is NIS 34.4 billion more than the projection in last year’s budget plan. The leap is primarily due to recent inflation, which has swept Israel away in a tide of rising costs as the Consumer Price Index has risen.

“In order to ensure the readiness of the State of Israel for the challenges that face the Israeli economy in the coming year and in the years to come, it is of great importance to return to a fiscally responsible policy route.”

New budget plan

According to the document, “Macroeconomic developments, including the increase in inflation, the tightening of the labor market and the increase in interest rates in Israel and around the world, have led to changes in the scope of the government’s expected obligations, alongside changes related to policy measures adopted since the publication of the last plan.”

 Finance Minister Avigdor Liberman, Interior Minister Ayelet Shaked and Zeev Elkin, Minister of Housing and Construction attend a press conference, presenting new reform on housing, at the Ministry of Finance in Jerusalem, June 12, 2022 (credit: YONATAN SINDEL/FLASH90) Finance Minister Avigdor Liberman, Interior Minister Ayelet Shaked and Zeev Elkin, Minister of Housing and Construction attend a press conference, presenting new reform on housing, at the Ministry of Finance in Jerusalem, June 12, 2022 (credit: YONATAN SINDEL/FLASH90)

Coronavirus' impact on the economy

The document presents elaboration from the Finance Ministry regarding the causes of that inflation.

“As we know, the corona epidemic that started in 2020 caused significant changes in the global economy and the Israeli economy,” it states. “After several months in which economic activity fell sharply, when at the same time the number of unemployed citizens... rose sharply during the spring of 2020... a period began which lasted about a year in which economic activity was fluctuating depending on the scope of the illness and the severity of [cautionary] restrictions.”

In response to the outbreak, Israel – like many other nations – adopted a fiscal policy that allowed it to provide “a wide economic safety net to the public and businesses that were affected as well as to expand the health response to the epidemic,” the plan says.

As a result, the deficit rose sharply to about 11.4% and the debt-to-GDP ratio jumped from approximately 60% to 72%.

Momentum toward economic recovery was gained the following spring, as more people found work and economic assistance programs were gradually phased out, which led to a rapid decrease in the deficit.

However, around the same time, public spending throughout the world increased as consumers used what they had saved during the initial lockdown period. Coupled with supply chain issues, that served to increase the rate of inflation sharply.

Put simply, a large availability of spending cash was met with not enough things to buy, leading to a nearly universal increase in prices in order to balance the forces of supply and demand.

Thrown into the mix was the war in Ukraine, which strained the already fragile global supply infrastructure, culminating in the worldwide inflation seen today.

All of these factors combined have led the Finance Ministry to conclude that in order to weather the storm of residual economic damage brought on by the pandemic, now (or whenever a new government is in place) is the time to start thinking about less spending.

“The budgetary and fiscal consequences of the pandemic will continue to accompany the economy many years after overcoming the health crisis,” reads the report. “In order to ensure the readiness of the State of Israel for the challenges that face the Israeli economy in the coming year and in the years to come, it is of great importance to return to a fiscally responsible policy route.”