BOI, IMF clash on Israel's deficit targets

Kahlon will have to cut NIS 10 billion from 2016 budget just to hit expenditure limit.

Karnit Flug at her office on February 3, 2015 (photo credit: MARC ISRAEL SELLEM)
Karnit Flug at her office on February 3, 2015
(photo credit: MARC ISRAEL SELLEM)
The Bank of Israel and International Monetary Fund each issued warnings Wednesday on the importance of keeping Israel’s budget deficit in line but drew different conclusions as to how much flexibility the government should have in its deficit plan.
Because no budget was passed for 2015, the government is running on an automatic extension of the 2014 budget, which is expected to result in a deficit of 2.5-2.8 percent of GDP, according to the BOI. The target for 2015 is 2.5% of GDP, but that is set to drop to 2% in 2016, and to 1.5% by the end of the decade.
The BOI indicated that Israel will need to cut NIS 10 billion in spending in 2016 to stick to current budget rules, and NIS 14 billion by 2020, but suggested that the shrinking deficit targets could be eased somewhat.
“In light of the considerable adjustments required to meet the existing fiscal targets, the government should examine if those targets are appropriate for its order of priorities and if it assesses that [it] will be able to meet them,” the BOI wrote in its fiscal outlook. “With that, in order to maintain fiscal credibility, it is important that the deficit target that is adopted does not exceed 2.5% of GD to assure a continued decline, even if moderate, in the debtto- GDP ratio.”
The IMF, however, took a more hawkish approach in its annual article IV consultation.
“Sticking to the current deficit law that reduces the deficit to 1½ percent of GDP by 2019 is critical,” the Washington, DC-based organization that works to ensure the stability of the international monetary system wrote.
If deficits stay in the realm of 3% of GDP, it said, Israel’s debt-to-GDP ratio will rise from its current 67% level to 80% in the long term (the BOI estimated that the current path would yield a 70% debt burden by 2020). If Israel sticks with its current path, the IMF said, the debt burden eventually would drop to 50%.
Many international bodies consider 60% of GDP a “sustainable” debt ratio.
The BOI also softened its previous stance, saying the government should consider whether it wants to soften its expenditure rule, which limits the amount spending can rise each year and acts to reduce the overall size of government.
Over the past decade, however, Israel’s government spending has fallen from a high level by international standards to one that is below the OECD average.
The IMF, on the other hand, said “measures will be needed to stick to the current expenditure ceiling,” and cautioned that “the expenditure ceiling is not tight enough to bring about the desired deficit reduction.”
If the 2015 deficit is a quarter point over its target, the IMF said, that quarter point should be taken out of the 2016 budget.
The fact that the expenditure rule and deficit targets are so-often changed means that, in practice, “there is no effective fiscal anchor,” the IMF wrote.
In its consultation, the IMF also noted that Israel’s economy was growing well, but faced serious challenges, particularly in that inflation remained too low; home prices continued to rise; productivity lags further and further behind the US; and income inequality is among the highest of developed nations.
Though it predicted growth would return to 3% in 2015, the IMF also said the biggest risks to Israel’s economy could come in the form of geopolitical instability; weak growth among its trade partners; or continued appreciation of the shekel.