Higher gov't spending could jeopardize investor confidence

Avishay Braverman submitted a bill to increase the spending growth target of the 2008 budget by 2.5% instead of the 1.7% originally set by the Finance Ministry.

avishay braverman 88 224 aj (photo credit: Ariel Jerozolimski [file])
avishay braverman 88 224 aj
(photo credit: Ariel Jerozolimski [file])
Economists warned on Wednesday that increasing the government's annual spending ceiling in the 2008 budget, as proposed by a new bill this week, could damage international investor confidence and threaten the positive momentum spurring economic growth. Labor MK Avishay Braverman submitted a private bill on Tuesday to increase the spending growth target of the 2008 state budget by 2.5 percent, or NIS 2 billion, instead of the 1.7% originally set by the Finance Ministry. "After the government already passed the 2008 budget in a first reading, changes to the spending ceiling would have a very severe impact on the markets and damage investor confidence of the international community," Prof. Rafi Melnick, Dean of the Lauder School of Government, Diplomacy and Strategy at the Interdisciplinary Center Herzliya and former senior economist at the Bank of Israel told The Jerusalem Post. "This is not the right time for Israel to deviate from investors' expectations, a time when there is much uncertainty over the state of the global economy, which is poised to slow down and when borrowing money could become more expensive." Prof. Melnick added that relative to other economies, Israel's economy was very stable and is growing at a fast pace; driven by foreign investor confidence and adherence to fiscal discipline, which the government would not want to jeopardize. Discussing the bill proposal at the Knesset Finance Committee this week, Braverman argued that in a situation such as now in which the economy is prospering and enjoying a budget surplus, money should be allocated to serve socio-economic issues such as investment into welfare, schools and hospitals. According to Braverman, the bill was backed by 69 of the 120 members of parliament. "Braverman's proposal to raise government spending by two thirds of the growth rate is based on a procyclic policy- one that moves in the same direction as the economy, which has proven in the past to be destabilizing, while government spending growth of 1.7% pertains to a countercyclic rule and one that moves in the opposite direction as the economy is stabilizing," Melnick said. Since the beginning of the year, the government has registered a budget surplus of NIS 8.7b. "2007 is likely to conclude with a budget surplus reaching up to 0.5% of GDP. This is in contrast to an original budget deficit target of 2.9% of GDP," Dr. Gil Bufman, chief economist at Bank Leumi wrote in a recent economic update. Other economists raised skepticism over the bill proposal. "What's important is not so much the height of the spending ceiling, but the structure of the budget. If spending is being raised to invest into infrastructure to improve schools, education and welfare, then we might see an economic benefit but not if money is spent on raising benefits," said Shlomo Maoz, chief economist at Excellence Nessuah. Only a few weeks ago, representatives of the international credit rating agency Standard & Poor's came to Israel to meet with Prof. Stanley Fischer, the governor of the Bank of Israel, and Finance Minister Ronnie Bar-On, for a review of Israel's economy. Fischer has been boasting about the growth of the local economy warranting an upgrade of Israel's credit rating, saying that debt-to-GDP ratio had fallen to 80%, the economy has not been affected by the US sub-prime mortgage crisis and that Israel was a candidate for membership in the OECD. S&P is in the process of reviewing Israel's credit rating and is expected to publish its update by mid-February. "Fiscal performance is an important component, which has an impact on our rating," Véronique Paillat-Chayrigues, credit analyst at S&P told the Post. "It's never good news if expenditures are increased. We would consider a downgrade of Israel's rating in the case of significant deviations from the fiscal policy expectations set by the Finance Ministry, although there are other components which determine the rating." In July, S&P warned that the country's credit rating outlook could be at risk if the government failed to maintain budget discipline. S&P warned that it would lower Israel's credit rating from "positive" to "stable" if the 2008 budget deviates from fiscal policy lines set by the government between 2005 and 2007. "Our positive outlook on the Israeli rating incorporates our expectation that fiscal strengthening will remain a key political priority and that the debt burden will fall at a regular pace. Should these expectations be misplaced, the outlook on the ratings could revert to 'stable,'" S&P cautioned.