IMF: Israel must curb defense spending

International Monetary Fund presents preliminary report on Israeli economy to Steinitz, Fischer in J'lem, says Israel must raise tax revenues.

Doyle shakes hands with Fischer and Steinitz 390 R (photo credit:  REUTERS/Ronen Zvulun)
Doyle shakes hands with Fischer and Steinitz 390 R
(photo credit: REUTERS/Ronen Zvulun)
The Israeli government must restrain defense expenditure and introduce additional revenue- raising measures if it is to stay close to the 2013 budget deficit ceiling, the International Monetary Fund said in a report released Monday.
IMF economist Peter Doyle and his delegation presented their preliminary report on the Israeli economy to Finance Minister Yuval Steinitz and Bank of Israel Governor Stanley Fischer in Jerusalem. The delegation compiled the report following two weeks of meetings with leading figures in the public and business sectors.
The final version of the annual report will be compiled in Washington and presented to the IMF Executive Board in March, as is the procedure for all 187 member countries.
The preliminary report welcomed the authorities’ commitment to maintaining the total spending limits in the 2012 budget. But it warned that unfunded fiscal commitments of around 0.75 percent of GDP made in response to last year’s social protests would have to be resolved within the 2012 budget framework.
Even if this is achieved, the report continued, the shortfall in revenues in 2011 due to housing and asset market-related receipts will likely persist, setting the stage for a deficit of 3%-3.5% of GDP in 2012, compared with a 2% of GDP ceiling.
The report said Israel’s economy remains strong, and praised the government for its two-year- budget framework and the central bank for cutting interest rates in response to global economic challenges. But it said “the critical task” of lowering public debt from 75% of GDP to 60% was becoming increasingly difficult, due to the downgrading of growth projections and an expected surge in retirements in the coming years that will reduce the country’s productive capacity.
The report recommended a number of fiscal, monetary and financial measures it said must be made in order to maintain stability. These included: increasing taxation on second properties to deal with renewed housing inflation; lengthening the horizon of the Bank of Israel’s inflation and GDP forecasts; and immediately reviewing the central bank’s emergency liquidity facilities and the legal framework for early intervention in the event of the bankruptcy of one or more large corporate groups.
However, even if all these steps are adopted, long-term stability will still depend on increasing the labor force participation rate of Arabs and Haredim, the report said.
It added that the government should encourage participation by providing basic child care and transportation in Arab areas, and by including Haredi males in the army in ways that support their employment and productive potential. In addition, it said action must be taken to remove impediments to business establishment in both communities, and the particular education requirements of both groups must be addressed.
Steinitz said at the presentation that he was pleased to learn the IMF supports the two-year budget framework. He added that the government would continue to act toward the integration of Arabs and Haredim in the labor market by creating opportunities for tertiary education and vocational training.
Fischer said Israel derived great benefit from the annual report. He also noted that the mission was supportive overall of Israel’s economic policies, but added that it put forward several issues for consideration and examination which the central bank would discuss seriously.