Lapid proposes to increase deficit to 4.9%

Proposal would increase gov't spending by NIS 6.5b.; Yacimovich praises Lapid, Braverman opposes proposal.

Lapid speaking at the Knesset 370 (photo credit: Marc Israel Sellem/The Jerusalem Post)
Lapid speaking at the Knesset 370
(photo credit: Marc Israel Sellem/The Jerusalem Post)
Finance Minister Yair Lapid submitted a proposal to the government to raise the 2013 deficit target to 4.9% from 3% of GDP, adding an additional NIS 19b. to the annual deficit. Lapid hopes to pass the proposal, which leaked late Wednesday night, at Sunday’s cabinet meeting.
In addition to increasing deficit targets, Lapid’s plan also ups the limit on how much the government can increase spending from one year to the next, allowing him to spend 2.2% more in 2013 than the previous year. That would give him room to spend NIS 6.5b. more than in 2012, according to figures cited in the proposal [Note: calculations using Treasury figures put the spending increase closer to NIS 6.3b.]. If the plan were approved, the 2013 budget would hover at around NIS 293b.
In 2014, Lapid would return the deficit limit to 3%, which is also higher than the current 2.75% target for that year. That change would swell the 2014 deficit an additional NIS 2.6b.
The move is likely to meet with disapproval from Bank of Israel Governor Stanley Fischer, who has argued that raising the deficit beyond its set levels is harmful to the economy’s long-term stability. Specifically, Fischer has said that higher deficits reduce faith in the government’s ability to keep its finances in order, raise future debt payments, which are higher for Israel than other similar countries, and rob the nation of tools for stimulating the economy should it come upon hard times in the future. Fischer has conceded, however, that the deficit was likely to overshoot its target this year.
Opposition Leader Shelly Yacimovich praised Lapid for taking action to limit spending cuts. “For the first time since taking office, the finance minister has made the right move,” Yacimovich said, adding that “even the European Union has become skeptical about the effectiveness of austerity policy.” Measures such as increasing VAT, imposing taxes, decreasing wages and cutting health and education benefits, she said, harmed the middle class, and the economy as a whole.
Fellow Laborite MK Aviashai Braverman, who chairs the Knesset Economics Committee, seemed to disagree.
"He's saying OK, listen, we're not going to deal with the deficit this year, it will be 5%, but I promise Stanley Fischer, I promise you that I will return to 3% in the short term, I'm very nice," Braverman said in an interview with Army Radio. "I always said that the deficit, when Israel isn't in a heavy recession, should go according to the European levels, the Maastricht levels, of 3%."
Shmuel Ben Arieh, market research manager at Pioneer Financial Planning, said the plan was based on political considerations, not economic ones.
"Expanding the deficit target is dangerous to the Israeli Economy's image as stable and responsible," he said. "It's puzzling that Netanyahu, who contributed to building this image, wouldn't oppose the proposed move," which he noted would further raise Israel's borrowing costs. Any deterioration in Israel's security situation, he added, would further swell the deficit.
In his proposal, Lapid wrote that passing the budget so late in the year limited his ability to meet the current legal targets.
"Approving the 2013 budget at a late time seriously reduces the ability of the government to carry out changes in the budgetary agenda in a way that fits its budgetary obligations," the proposal said. Spending obligations made by the previous government "create a concern that, in the absence of adapting actions by the government, the government deficit for 2013 will rise to 5.5% of output."
Because the government hasn’t yet passed a budget, it is currently working on a month-by-month automatic extension of the 2012 budget. According to treasury figures, the cumulative deficit for the past year has already risen to 4.5% of GDP.